By Paul Cherney
Momentum measures based on end of day data for both the Nasdaq and the S&P 500 are still positive. The Nasdaq remains the stronger of the two. Even though the S&P 500's end-of-day momentum measures remain in positive territory, they have flattened. The small and mid cap stocks have been the real winners in the marketplace and by its very nature, the S&P 500 does not contain small and mid-cap stocks. The S&P 500 has been held back by financials and consumer stocks.
The S&P 500 has moved toward an area of thick resistance which has capped prices for two months. The thick resistance for the S&P 500 is 1008-1015.
Near the close of trade on Thursday, the 10-day exponential moving average of the VIX (market volatility index) was 20.25. A move above that level would probably coincide with weakness in stock prices. Downside risk looks limited in the short-term (next few trade days). It would probably take a VIX reading below 19.25 to signal valid strength in the stock markets.
Immediate downside risk (worst case) looks limited to S&P 500 prints 991-984 or Nasdaq prints 1753-1737.
Resistance: The Nasdaq resistance is 1778-1829.58. There is a gap in the price chart which runs from 1778.80 to 1796.46; it was created by a downward gap at the opening on Apr. 22, 2002.
Immediate resistance for the S&P 500 is 1003-1015.41. Its focuses of resistance are 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 a stumbling block for S&P 500 prices.
Supports: The S&P 500 has support at 991-984, stacked at 985-974 and 976-960.84. I cannot rule out that sometime before the middle of September that 949-912 support will be tested. The S&P 500 still technically has a small chance of printing under 950. 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.
The Nasdaq has a broad layer of support at 1758-1722. The index has a shelf of price traffic at 1753-1737, which has to be considered a focus of support. The Nasdaq has stacked support at 1736-1711, 1703-1695, and 1694-1681.31.
Next week is the week before the Labor Day weekend.
Here are some historical statistical facts about the performance of the S&P 500 in the week before the Labor Day three day weekend. All numbers based on S&P 500 data from 1972 to 2002.
For the week prior to Labor Day, historically, the S&P 500 has gained ground 20 of 31 times or 64.5% of the time.
For the individual trading days in the week prior to Labor Day:
Mondays have seen closing gains (S&P 500) 17 of 31 times, 55% of the time.
Tuesdays have seen closing gains (S&P 500) 16/31, 52% of the time.
Wednesdays have seen closing gains (S&P 500) 17/31, 55% of the time.
Thursdays have seen closing gains (S&P 500) 8/31, 26% of the time.
Fridays have seen closing gains (S&P 500) 21/31, 68% of the time.
There is a real statistical anomaly in the Thursday data. In 1979 and 1992, according to my data, the S&P 500 was unchanged on the day. Unchanged on the day does not happen very often. In 2002, the Thursday before Labor day weekend came close to doing it again when the S&P 500 only managed to gain 0.07 point which represented a gain of 0.01%.
If you averaged all of the Friday performances (gainers and losers), the gain was 0.34%. If you averaged just the gaining Fridays, the average gain was 0.76%. Fridays had six trading days in the series where prices moved more than 1% as of the close: five were gainers of more than 1% and one was a loser of more than 1%.
The best chance historically for a losing session is the Thursday before the weekend, and the best chance for a gaining session is Friday. I wondered if those Friday gains might be rebounds from Thursday losses so I compared losing Thursdays to Friday's closing performance (to see how many times a loss on Thursday was followed by a gain on Friday). There were 21 losing Thursdays, 13 of them were followed by gaining Fridays, that means 62% of the time a Thursday loss was followed by a Friday gain.
I looked at each of the trade days to see which one had historically demonstrated the greatest likelihood of seeing prices close with greater than 1% movement on the day (in either direction) and curiously enough it turned out to be Thursday which had 11 closing gains or losses of greater than 1% (even though Thursdays also had two days (almost three days) which were unchanged). There were three Thursdays before Labor Day which saw gains of more than 1% and there were eight which saw losses of more than 1%. If you look at the Friday performances after a Thursday loss of more than 1%, five of them were followed by gaining Fridays -- 62.5% of the time.
Cherney is chief market analyst for Standard & Poor's