By Paul Cherney
Volume measures are positive. Odds favor that the line of least resistance is higher but markets do not trade higher every single trade day. Some profit-taking and lower closes on Tuesday would be perfectly natural.
On Friday, Oct. 1, the Nasdaq broke out to the upside. Part of the fuel for a breakout was supplied by short-term traders recognizing a bullish pattern and capitalizing on it by buying. Many of them also want to take short-term profits and that is why many times after a break above obvious resistance, the lift stalls after a day or two and prices can retrace and test the price-point of the breakout (for the Nasdaq that would mean prints of 1,933.03 or lower).
Monday's intraday high for the Nasdaq was 1,965.76. The 200-day simple moving average for the Nasdaq is in the vicinity of 1,964.55; there are a lot of technically oriented players who pay attention to the 200-day line and they might be using a test of this line as a cue to take short-term profits. The last time the Nasdaq was at its 200-day MA was on July 6, when it broke down below the 200-day MA; on Monday, Oct. 4, the index was testing it by rising from below. It would be a natural spot to see a little hesitation in the current uptrend.
On the daily chart, the immediate layer of support (well-defined) is Nasdaq 1,933-1,892.08. After a breakout like this it is natural to see a little profit-taking, I would not become concerned about a failure and a move lower unless the Nasdaq closed under the 1,895.70 level.
Nasdaq resistance starts at 1,960 and runs to 2,055. Resistance in this area is especially thick 1,972-2,006.
The chart for the S&P 500 has resistance 1,137-1,150.57 (this resistance represents the sideways topping action during June and April). The S&P 500 has additional resistance 1,147-1,163.23, which makes the 1,147-1,150.57 area a focus of resistance.
The VXO: key short-term levels for the CBOE volatility index, or VXO, are 13.05, 13.81, 14.92 and 15.47 These are levels that if exceeded would probably coincide with price weakness in equities (the higher the VXO moves, the greater the price weakness, but this would also create a greater chance that a reversal lower in the VXO will ignite aggressive buying).
Immediate support for the Nasdaq is 1,933-1,900. The index created a price gap on Friday morning (October 1, 2004) when it gapped higher at the open. The price gap is 1,908.57-1,902.25; not all gaps get filled but many technically oriented traders will recognize the gap and might be hesitant to commit to the long side until some portion of the gap is filled. A truly strong market will ignore a gap behind it in the price chart and just keep moving higher. There is no rule of the marketplace that dictates that all gaps get filled.
Immediate support for the S&P 500 is 1,131-1,126, then 1,117-1,103.24, overlapped at 1,111-1,101, which makes the 1,111-1,103 area a focus of support.
Immediate resistance for the S&P 500 is 1,137-1,150.57; additional resistance is 1,147-1,163.23, which makes the 1,147-1,150.57 area a focus of resistance.
Immediate resistance for the Nasdaq is 1,960-2,055. Resistance in this area is especially thick 1,972-2,006.
Cherney is chief market analyst for Standard & Poor's