By Paul Cherney
Technically, both the S&P 500 and the Nasdaq are overbought on short-term price momentum based measures, but strong bull runs can post consistently overbought readings on a short-term basis for days and days.
Longer-term momentum measures for both the Nasdaq and the S&P 500 remain positive.
Downside appears limited because momentum measures have registered levels which usually mean residual positive momentum is in place. When this is the case, the first pullback in price, even a decline of two or three trading days, is usually viewed by the markets as a buying opportunity.
Near the close on Thursday, Jan. 8, the 10-day exponential moving average of the VXO close was 15.91; if the VXO moves back above 15.91, that would probably be coincident with weaker stock prices that might last more than just intraday. Until that happens, the trend is for higher prices. A low VIX or a low VXO is not a danger in and of itself. The only danger comes when the VIX or the VXO starts to rise and exceeds resistance levels. That has not happened in this market and until the VXO starts a move above its 10-day exponential moving average, assume a positive market.
Immediate intraday supports for the S&P 500 are a stacked staircase beginning with 1,128-1,125, then 1,124-1,119.90. Additional supports are 1,118.48-1,113.69, then 1,106-1,100; the broad support is 1,106-1,068 and 1,083-1,053, which makes a focus of support 1,083-1,068. Price support thickens with prints of 1,096 and lower.
Immediate resistance for the S&P 500 is still 1,116-1,133, then 1,151-1,176. Sometimes, when an index makes its first break above the top of immediate resistance (daily bars), it can attract sellers for a retracement and prices often move back below the breakout point. For the S&P 500, the 1,133 level might see a price reaction like this.
Immediate support for the Nasdaq is 2,089-2,078, then 2,062-2,047, then 2,037-2,027, then 2,022-2,010. Considerable support exists at 2,001-1,986 then 1,974-1,960.
The Nasdaq is at the upper edge of an old band of resistance on the daily charts which runs 2,026-2,105. Quite often, the first move above a level like this (a move above Nasdaq 2,105) can bring some sellers to the market for a short-term, one- or two-day retracement. Based on recent measures of price momentum and price combined with volume for both the Nasdaq and the S&P 500, I would expect any short-term pullbacks in price to be shallow and another short-term move higher would be expected.
There is virtually no competition for an investment dollar. Downside appears limited, but after the earnings reports for the fourth quarter, the upside might be limited, too, as the markets digest some of the gains of the past 15 months.
Cherney is chief market analyst for Standard & Poor's