By Paul Cherney
The indexes enjoyed a rebound on Tuesday and the price and volume looked constructive. Breadth measures have improved and I think it is a little more likely that the buyers will be making a stand here.
What the markets need to see (and this might be difficult as we head into the peak summer vacation time) is consistently higher volume. In the previous column, I made comments on the CBOE volatility index, or VXO, and the two bottoms (this year) that led to gains of more than just a day or two. I observed that at the last two bottoms (since the beginning of the year), the VXO printed and had at least one close (end of day) above the 20.00 level. So far in the current decline since June 30, the highest close for the VXO was Tuesday's 17.00.
I have to update this observation. As I was looking over daily charts for the past year I recognized that S&P 500 prices are currently in a technical retest of the prices at the May bottom. I think I was wrong to include the observation that the VXO had not yet had a close above the 20.00 level (as it had in the March and May bottoms), because in a successful retest of a low, volume usually contracts and price action can be subdued (meaning lower VXO). I think that could be what we are seeing now, but I am in a state wonderment as to how the volume is going to come into the markets at this time of the summer.
Tuesday's action was constructive and if the volume stream continues at current levels, or if we see good volume on up days and light volume on retracement days, a more positive attitude toward prices would be warranted.
For now, I consider downside to be limited to the recent lows.
Support for the S&P 500 is 1,106-1,076, with a layer of support at 1,085-1,076. The nature of the rise during the fourth quarter of 2003 established thick and well-defined price support at 1,074-1,058, and any test of this area should attract buyers.
Very near the end of trading on Tuesday, the VXO was 15.79. The 10-day exponential moving average of the VXO was 15.93. Tuesday's market saw a constructive move lower for the VXO.
Support for the Nasdaq is 1,860-1,843, with thick support at 1,840-1,843. It would be a short-term bullish sign if prices rose again on Wednesday and any retracements did not undercut 1,842. Supports are stacked and the next support was my projection for the bottom of the descending trading channel for the Nasdaq, which was 1,842-1,830; the actual print low on Monday was 1,829.06, just below the 1,830 level. Next focus of support is 1,815-1,792.
Immediate resistance for the S&P 500 is 1,092-1,101, with a focus at 1,094.85-1,099.69, then 1,103-1,109.30, 1114-1119.60, stacked and overlapped at 1,118.56-1,122.37. Well-defined intraday resistance is 1,123-1,130.33, with a focus at 1,124.60-1,127.02.
Immediate intraday resistance for the Nasdaq is 1,865-1,892.
There is a gap on the Nasdaq chart that was created by the gap lower opening on Friday, July 23, 2004 (it was in reaction to Microsoft's (MSFT ) earnings report Thursday after the close). The gap runs 1,874.46-1,885.08. The first test of a gap like this can attract some sellers.
The Nasdaq has a thick layer of resistance at 1,908-1,933.
Any time resistances are exceeded they must be treated as supports until proven otherwise. Any time supports are undercut they must be treated as resistance until proven otherwise.
Cherney is chief market analyst for Standard & Poor's