By Paul Cherney
On Wednesday, the drop in oil futures turned the day around for equities. On Thursday, oil futures prices also affected stock prices, only the direction for equities was lower as oil prices jumped to a new 21-year closing high. The relationship between oil and equities has been fierce in the last few weeks and this is a factor that might come into play again tomorrow.
The money in the oil futures has been made on the long side this week and if traders want to book some of those profits ahead of the weekend, then oil futures might back off the highs, if that were to happen it might be a background positive, depending on the nonfarm payrolls number.
These markets need to see signs of strength returning to the employment numbers. The Street expects July nonfarm payrolls to have increased by about 250,000. If the number falls short in Friday's report, and prices drop dramatically at the opening of the regular trading session for stocks, the morning could be ugly. But just as with the oil, there are bears short of this stock market and the weekend approaches, so even if there is a selling stampede in the morning on Friday, some bears might think that's just about the "worst" headline there will be to push prices lower. They will probably take advantage of a drop in prices as an opportunity to book short-sided profits -- and that has the potential to lift prices well above the lows later in the day.
Momentum measures that I run on the daily chart for the CBOE volatility index, or VXO, have now turned higher, suggesting that the trend for the VXO has shifted from sideways to higher. A higher VXO is usually accompanied by lower stock prices. This is only one measure of the market, but I interpret it as a negative right now.
We all know it will be oil futures and the nonfarm payrolls tomorrow that will dictate price action, but right now, I would describe the technical case for equities as negative in terms of the movement in the VXO. However, just as there are extremes in the oil and the nonfarm payrolls, the VXO can move to an extreme, too. If the VXO can start to print above 20.11 and then reverse and undercut 19.38, then a lift from the morning lows would be more likely (if there is a bearish opening).
Short-term concerns about additional downside for the S&P 500 are in place as the index has closed below 1,091.
Immediate S&P 500 support runs out at the May low which was 1,076.32. However, due to the extensive and compact price action during the fourth quarter of 2003 there is support directly below this level at 1,063-1,031, with a focus of support 1,060-1,046.
The Nasdaq's next layer of support is 1,815-1,783, stacked support is 1,776-1,600 with a focus at 1,733-1,765.
Immediate intraday resistance for the S&P 500 is 1,086-1,092, then 1,103-1,109.30, then 1,114-1,119.60, stacked and overlapped at 1,118.56-1,122.37.
Immediate intraday resistance for the Nasdaq is now 1,831-1,843.05, then 1,848-1,864, then 1,874-1,880.81
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