By Paul Cherney
The price action in the Nasdaq on Thursday, Feb. 10, was not bearish. Prices moved toward the 2,039-2,008 level of support and found buying interest before prices could even print under 2,040 (the intraday low was 2,040.04). When this happens, when the buyers move in to become owners above support, that can sometimes signal that downside is limited.
The possibility for short-term Nasdaq upside (one or two days) is real. Maybe Dell's (DELL ) earnings report or comments, expected after the close of trading Thursday, will inspire some short-covering and bargain hunting on Friday.
Thursday's action did not unfold the way I thought it would, I expected to see Nasdaq prices move a little lower. I am starting to think I was wrong about immediate downside risk, especially when I look at the drop in the CBOE volatility index, or VXO, back below its 10-day exponential moving average.
If the Nasdaq can print above 2,059.65 (Thursday's intraday high) then there should be an intraday wave of buying. If the Nasdaq can move above 2,069.66 I would expect to see more follow-through higher and a spike in buying interest.
It is the potential weakness in the Nasdaq that can pull the S&P 500 lower, but on Thursday, the Nasdaq stabilized.
Thursday's session ended with short-term momentum measures stabilizing as opposed to Wednesday's negative bias. (These measures are based on end-of-day bars, not intraday bars.)
Very near the close of trading on Thursday, the 10-day exponential moving average for the VXO was 11.86, while the 30-day was 12.58. Expect price weakness in stocks if the VXO moves above 11.85. Expect aggressive selling is in place if the VXO moves above 12.58
For the S&P 500, immediate supports are numerous; in my opinion, the most important immediate support level is 1,190-1,185.63, because if this little shelf is undercut, then a stairstep decline might unfold. On the daily charts there is support at 1,184-1,160, but inside this support are shelves. The biggest support looks like 1,178-1,163. Next support is 1,142-1,090.
The Nasdaq's immediate shelf of support at 2,057-2,049 was undercut intraday on Thursday, but buyers moved in at price print 2,040.04, just above the next layer of support at 2,039-2,008. The Nasdaq 2,039-2,008 area of support has a focus of support at 2,036-2,024 and this area looks like a natural spot for some short-covering and bargain hunting in the event prices print there.
Nasdaq immediate resistance is 2,062-2,069.66, substantial resistance is 2,078-2,116.
S&P 500 resistance is 1,195-1,198.01, then 1,205-1,226.27, with a shelf of resistance 1,205-1,209.53 and another shelf of resistance 1,215-1,226.
Historical Fact: In the past 47 years, strength in the first half of February is very common after a down January. Based on S&P 500 data since 1958, 76% of the time, the highest intra-month close for February has occurred on or before the 11th trading day of the month (the 11th trading day this year is Feb. 15). Februaries that follow down Januaries have finished the month lower 65% of the time, so monitoring the VXO is important, because usually, when the VXO is rising, stock prices are falling.
Cherney is chief market analyst for Standard & Poor's