Time for a Pause?

A short bout of profit-taking might have to occur before the markets can stage another move higher

By Paul Cherney

The markets will be closed Monday, Jan. 19, in observance of Martin Luther King, Jr. Day. Longer-term momentum measures for both the Nasdaq and the S&P 500 remain technically positive.

Daily measures are in positions which can see pops in price which fail to garner significant follow-through higher and sometimes, sloppy, sideways and slightly lower prices can unfold. This coming Tuesday, after the three-day weekend, some unwinding of hedges might result in some lower prices intraday, or even a day and a half of lower prices, but at this time, I do not have configurations of indicators that would increase the odds for something dramatic to the downside.

The CBOE volatility index, or VXO, is under its 10-day exponential moving average. The chances for a good move higher do increase when the VXO can move under its 10-day exponential moving average, but also understand that the lower the VXO moves, the less likely big price moves become.

The VXO measures implied volatility in OEX options contracts, and for now, implied volatility based on this measure is contracting. The VXO is based on options for the OEX, which is the S&P 100. There are only seven Nasdaq stocks in the OEX, so the VXO might more closely correlate with price action in the S&P 500 rather than the Nasdaq (although they both tend to move in unison, varying only in the size of the move). The seven Nasdaq stocks which are in the S&P 100 are Amgen (AMGN ), Cisco Systems (CSCO ), Intel (INTC ), MedImmune (MEDI ), Microsoft (MSFT ), Nextel (NXTL ), and Oracle (ORCL ). On a market cap weighted basis, these stocks represent roughly 15.5% of the OEX.

A short bout of profit-taking might have to occur before another small leg higher can unfold.

Very near the close of trading on Friday, the 10-day exponential moving average of the VXO was 16.02.

Immediate intraday resistance for the S&P 500 is 1,133-1,139.75. The next layer of resistance is 1,151-1,176.

Immediate intraday supports for the S&P 500 are a stacked staircase beginning at 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 support for the Nasdaq is 2,121-2,105, then 2,101-2,084, 2,089-2,078, then 2,062-2,047. There is a focus of support at 2,089-2,084.

The Nasdaq is currently in a layer of resistance at 2,121-2,181, which was established in June, 2001.

The next two observations seem to make a good case for a sideways market.

• Good earnings reports could be viewed as a "sell on the news" event for some companies, capping upside, although on Friday, good earnings reports combined with an option expiration sent Nasdaq techs higher.

• There is virtually no competition for an investment dollar, so downside should still be limited, but as the earnings reports for the fourth quarter are delivered and digested, the upside for the markets might be limited.

Cherney is chief market analyst for Standard & Poor's

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