More Pain Likely for Stocks

The Nasdaq has closed below its most recently established trading range, opening downside risk for prints under 1,889

By Paul Cherney

I think there is probably going to have to be more selling. I also think that a technical condition known as positive divergence might help identify a bottom. I think there is good potential for a positive divergence in the 14 bar relative strength index (RSI). A positive divergence is when the price of an index moves to a close that undercuts its most recent lowest close while, simultaneously, an indicator like the 14 day RSI posts a level higher than its own recent low.

The chance for a positive divergence between price and 14-day RSI is very high in my opinion, but one of the technical realities is that a positive divergence cannot be confirmed until the RSI turns back up, to create a low point for the indicator. It is not a "given" that prices will reverse and trend higher after a positive divergence between index prices and the 14 bar RSI, but in my view of the markets it increases the chances terrifically. When a positive divergence in RSI is confirmed by a move up from a low in the RSI, it will create a situation that technically oriented traders might use to justify some long-side exposure.

Just having a lower close in the equity indexes and a higher RSI relative to its most recent lowest reading is not a confirmation of a positive divergence, a confirmation can only be declared once the declining RSI reverses, creating a low point for the indicator. Not all positive divergences lead to higher prices, but this technical condition will be recognized by many technically oriented traders and investors, and if one unfolds, those technically oriented traders and investors will be adding themselves to the pool of potential buyers. The potential buyers would include bears covering shorts, bargain hunters and gamblers trying to call a bottom.

The Nasdaq has closed below its most recently established trading range of 1,904.27-1,962.41, this has opened downside risk for prints under 1,889. The former trading range now represents immediate resistance with especially thick resistance 1,929-1,937. The S&P 500 would have to close under 1,136.22 to break its 1136.22-1964.80 range.

Immediate intraday resistance for the Nasdaq is 1,913-1,927.31, S&P 500 1,148-1,155.46. The S&P 500 has additional resistance at 1,157-1,164.80 with especially thick resistance at 1,159 and higher.

S&P 500 support is 1,152-1,136.22. The index also has support in the 1,147-1,120 area with a focus of support at 1,142-1,131, but a move below 1,136.22 would represent a new low for the current weakness and open downside risk for a test of the 1,127-1,120 area.

Nasdaq support: In a longer-term view of the chart, the Nasdaq has two layers of support that were established in September and October of 2004: 1,971-1,899.33 and 1,925.85-1,852.59. The overlap is 1,925.85-1,899.33 and this still represents very strong support, but the most recent intraday low print of 1,904.27 has been undercut and follow-through lower might cause a capitulation of selling that forces Nasdaq prices under 1,889 in search of buyers above 1,852.59.

Cherney is chief market analyst for Standard & Poor's

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