By Paul Cherney
Technical measures based on daily price bars remain positive, but the short-term balance between buyers and sellers will probably keep prices moving mostly sideways on Tuesday.
There has been another leg lower for crude oil prices and this should ultimately prove to be a positive for equity prices. But the markets are concerned that there might not be a definitive winner in the Nov. 2 presidential election. Memories of the 2000 election and the sharp decline in the markets that followed the uncertainty of exactly who was the victor might easily keep the sidelines filled with observers, waiting to see if there is a definitive winner as of the open on Wednesday, Nov. 3.
I am not representing the following numbers as valid statistical studies, I am simply telling you what has occurred historically, on a price-only percentage move basis for the S&P 500 since 1960.
If there is no definitive winner as of the morning of November 3, 2004, I would expect the markets to move lower. The market in 2000 had a myriad of problems to grapple including the unwinding of the speculative bubble of the late 1990s, but prices weakened markedly starting the day after the election and if that air of uncertainty is re-created this year, I would assume the same outcome: lower stock prices.
If I eliminate the performance in the wake of the 2000 election and categorize it as a unique event (with the potential ramifications described above), and then look at the remaining market reactions after presidential elections one of two things can happen: either the incumbent party in the White House will retain occupancy or the incumbent party will lose.
I have looked at the first 44 trade days after elections since 1960 as to whether the incumbent party retains the White House or loses, and the average downside risk (closing basis) whether Bush wins or Kerry wins is virtually the same: about 2%. If Bush wins (the incumbent), the average of the lowest closes when incumbent retains White House was -2.07%. If Kerry wins, the average was -1.92% (remember this is after eliminating election year 2000 due to the non-election decision).
Also, on average since 1960, in the first 44 trading days after the election (44 trading days is roughly 2 months), if the incumbent retains the White House, the average of the highest closes in the first 2 months after the election was +3.12%. If the incumbent party loses, the average of the best closes was +5.85% (election year 2000 eliminated from grouping).
Overall, there is still a positive bias in place technically and I think that if there is a definitive winner, short-term downside should be limited and prices should at least have some sort of relief lift. Huge gains do not look likely to me.
Here are short-term important intraday support levels: Nasdaq, 1,960-1,954.29; S&P 500 1,120.96-1,117.14. This remains my view: I do not expect these prices to be undercut, but if the Nasdaq 1,954.29 or S&P 500 1,117.14 levels are undercut for more than four minutes inside the trading day, that would increase the chances for weaker prices, and a possible test of the Nasdaq 1,937-1,926 area. For the S&P 500, a test of the 1,111-1,108 would be possible.
Immediate supports are stacked and a dramatic decline would probably require a headline everyone recognizes as bearish.
Immediate chart support for the Nasdaq (intraday) is 1,973-1,964. The next layer of support is 1,957-1,934. This chart support along with the overlap of the intraday support mentioned above makes a focus of short-term support at 1,957-1,954.29. Next support is 1,927.51-1,914, then 1,916-1,906.
Immediate intraday chart support for the S&P 500 is 1,128-1,124. The next layer of support is 1,119-1,111; the 1,119-1,117 area remains a focus of support. Next organized support below 1,111 is stacked at 1,108-1,098.
There is a shelf of resistance for the Nasdaq right at current prices: 1,972-2,006.58, this is all part of the 1,960-2,055 band of resistance. Inside this 1,972-2,006 layer is especially thick resistance at 1,985-2,000.
The S&P 500 has resistance at 1,127-1,142.05, with thick resistance 1,132-1,142.05 (a likely stall zone). Next resistance is 1,147-1,163.23. There is a focus of resistance at 1,147-1,150.57.
At a minimum, the CBOE volatility index, or VXO, is probably going to have to undercut 15.87 (chart read) to suggest aggressive buying, but any move below 16.24 would be a background positive.
Cherney is chief market analyst for Standard & Poor's