By Paul Cherney
On Monday, June 28, the S&P 500 issued a short-term oversold signal. Over the past year, this signal has fired 7 times every single following trade day saw the S&P 500 gain ground. Not all gains were big and all of the occasions referenced occurred in a bull run for prices, but based on the past year, odds are stacked for a positive close for the S&P 500 tomorrow. The dates of the previous signals: April 30, 2004; March 11, 2004; January 28, 2004; September 26, 2003; September 10, 2003; July 17, 2003; and June 23, 2003.
Lingering in the Background: On Friday, June 25, the Nasdaq had a close above 2,023.54, and this has potentially short-term bullish overtones. The recent trading range has been 2,023.54-1,963, or 60 points, so the potential upside target would be 2,083.
On Wednesday, June 23, the S&P 500 closed above the 1,142.18 level. This represents a bullish breakout of the recent trading range and should be treated as such unless proven otherwise. It is perfectly natural for a breakout to retrace and test the upper edge of the trading range of the breakout. The standard calculation for a potential price target is to take the trading range (1,142-1,122) and add it to the breakout point which would create a potential target of S&P 500 1,162.
Intraday rises that were turned back have established another set of important price levels for both the Nasdaq and the S&P 500. Nasdaq 2,039.93 and S&P 500 1,146.34 are the price levels and if these levels are exceeded, pressure will be on shorts to cover. Any rise that cannot produce a Nasdaq close above 2,039.93 and/or the S&P 500 close above 1,146.34 would increase the chances for some slow motion sideways trade in the upper half of the recent trade ranges.
The 10-day exponential moving average for the CBOE volatility index, or VXO, was 14.84 near the close on Monday. Stock prices often move lower when the VXO moves above its 10-day exponential moving average and puts distance between itself and the 10-day, so, a lift in stock prices is probably going to have to force the VXO back below 14.84. If not, this would raise suspicions about the ability of the advance to sustain itself.
The Nasdaq's immediate resistance is 2,033.40-2,039.93. Older resistance is a band at 2,037-2,079; inside this resistance is thick price action at 2,048-2,064.
The Nasdaq has support at 2,023-2,013.73, then 2,006-1,960, with a focus at 2,002-1,985. It is a mixed set of conditions for the Nasdaq because on a chart basis, if the Nasdaq were to weaken again and undercut the 2,013.73 level, then that would increase the odds for a test of the next layer of Nasdaq support that is broadly 2,006-1,960, with a focus of support at 2,002-1,985.
S&P 500 resistance is 1,149-1,176.97, with especially thick resistance at 1,149-1,158.98. The March, 2002, chart shows a well-defined layer of resistance at 1,166.27-1,173.94.
The S&P 500 has support at 1,142-1,134, with a focus at 1,137-1,134. Next support is 1,129-1,113.
Downside should be limited and higher prices should unfold but if there is one day of an inability to gain ground and close with gains on the day, then expectations would grow that the markets see sideways price action and a drift lower.
Cherney is chief market analyst for Standard & Poor's