By Paul Cherney
The technical condition of the markets is neutral with a negative bias.
The VIX (market volatility index) is above its 10-day exponential moving average and it usually is not healthy when the VIX is moving higher, away from its 10-day exponential. Very near the close of trading on Friday, the VIX's 10-day exponential moving average was 21.19. Generally, a move above the 10-day is coincident with declining equity prices and a move below it is coincidental with rising equity prices
The VIX will probably have to move below 20.87 to suggest that bulls are taking control on Monday.
The markets may have started a protracted correction which could see the S&P 500 print under 950, maybe a retracement to the 930-910 area. Other technical conditions might change this view, and oversold rebounds are always part of such a decline, but these markets have not seen a one-third or a 50% retracement for the move up since March's lows, and retracements like that are common.
Obviously, it would take an S&P 500 break below the 974 level to set these gears in motion and that has not happened yet, but the big question I have is: What is left to spur buying? Even if Saddam Hussein were captured, it might only produce a one-day jump in prices.
We are entering the doldrums of August and prices might move in a dull sideways trend with a negative bias. The short interest in the Nasdaq might contribute to a dull sideways and lower market because dips in price might be used by some bears to buy to cover existing short positions, stemming the descents and prompting short-lived rebounds in price.
The potential for a break lower in prices would come if the S&P 500 undercuts 976.04-974.00, or in the short-term, the potential for a little break lower in the Nasdaq would be in place if the Nasdaq undercuts 1710; that would open downside risk for Nasdaq prints 1699-1685. The bigger concerns for a Nasdaq leg lower would not come unless the Nasdaq undercut the 1675 level. Due to the nature of the advance and the price action in June, there is considerable Nasdaq support 1686-1597, so it is difficult to make a case for a plunge.
Resistance: Overhead resistance has proven itself to be formidable.
The Nasdaq has big resistance: 1722-1758. Inside this layer of resistance is a focus of resistance at 1737-1753.
Immediate intraday resistance for the S&P 500 is 984-991. The S&P 500 has big resistance at 988-1015.41. Its focuses of resistance are 993-1000, 1005-1008 and 1010-1015. The bigger picture of resistance which was established by price action in June, 2002, is that the S&P 500 has a band of resistance at 1008-1041 with a focus at 1020-1031. If you look at the overlap of resistances, the 1008-1015 layer is the immediate stumbling block for S&P 500 prices.
Supports: The S&P 500 has an important layer of support at 988-974. If 974 were undercut without attracting buyers within just a few minutes, that would be a sign that the buyers are not interested at current levels and they are probably going to stand back, waiting for lower prices. This means that if prices spend time (more than 10 minutes) below 974, then I would expect the thin shelf of support at 970-962.10 to fail and that prices will probably have to test 949-912 support. This scenario would not have to unfold one trade day after another, (not down, down, down every trade day), short-term oversold rebounds in would be natural.
The Nasdaq has immediate support at 1720-1707 with a focus of support at 1715-1710. Additional supports are 1703.62-1695.20, then 1687.94-1675.18. The bigger picture for Nasdaq support is 1699-1653; there are multiple layers of support inside this broad band including 1686-1653 with a focus of support 1682-1664. The overlap of these shelves of support is 1686-1682 which should carry some importance. If prices spent time under this level, I think the odds would increase for a break below 1675. Due to the nature of the rise since the March lows, Nasdaq supports are stacked; the next support is 1648-1597, which makes the prospects of severe, gut wrenching declines unlikely because there has been so much price action at these levels on the charts (many price points offer lots of people lots of different sets of numbers to try to pick a bottom).
Cherney is chief market analyst for Standard & Poor's