By Paul Cherney
Late in the session on Friday, Jan. 23, oversold signals were generated in charts based on Nasdaq 60-minute bars and on S&P 500 60-minute bars. This is a set up for a short-term oversold rebound on Monday, which should be able to post a gain on the day.
The reversal from the lows on Friday prevented secondary measures of price momentum from hitting thresholds which would have dramatically increased the chances for additional weakness and closes for the Nasdaq of 2,105 or lower and S&P 500 for a close 1,131 or lower. These expectations have now been relegated to coin-toss status (50-50).
If there is going to be some more downside, the CBOE volatility index, or VXO, which measures implied volatility in OEX options contracts, is going to have to move above its 10-day exponential moving average, and so far it has not been able to do this.
Very near the close of trading on Friday, the 10-day exponential moving average of the VXO was 15.37. I don't think there can be even a small retracement in stock prices if the VXO does not move above this level.
The chart shows a good layer of Nasdaq support at 2,105-2,077. The Nasdaq has a additional, smaller layers of support at 2,121-2,105 then 2,101-2,084, and 2,089-2,077.
Immediate intraday resistance for the Nasdaq is 2,129-2,139. The first layer of broader resistance established in the spring of 2001 is 2,121-2,181; in the past few trading days, the index has developed a well-defined layer of immediate intraday resistance at 2,144-2,150.
The chart for the S&P 500 shows good support at 1,131-1,115.
The S&P 500 has a layer of immediate support at 1,138-1,133.
Additional supports for the S&P 500 are a stacked staircase beginning at 1,124-1,119.90, 1,118.48-1,113.69, then 1,106-1,100
Immediate resistance for the S&P 500 is 1,151-1,176.
The chances that these markets are establishing a trading range appears high. Upside is being limited by profit-takers who have been long, and downside is limited by a continual stream of buyers who recognize the strong historical precedence for an up election year. They also recognize that there is a lack of competing investment returns. It would take a year in a money market fund to earn just 0.7%.
Cherney is chief market analyst for Standard & Poor's