By Paul Cherney
The bigger picture for the next few trading days is that I expect more price weakness than we have seen so far. That is my view until I see improvements in the measures that force a re-assessment.
There have been a combination of momentum indicators for the Nasdaq that increase concerns about additional weakness. After readings like this, there can be some sideways price action and a feeble attempt at a lift (maybe just Friday), but this signal is often followed by additional weakness. Obviously, Tuesday's FOMC announcement can ignite a market reaction on the upside if the Fed surprises with a pause at the meeting (this does not seem likely at Tuesday's meeting) or if the market interprets the wording of the announcement as a hint that a pause is likely. As we approach Tuesday, Sept. 20, what the Fed will do represents an uncertainty and markets are generally cautious when faced with uncertainty.
The quarterly expirations, when the monthly stock and index option expirations coincide with the quarterly expiration of stock and index futures contracts, are on Friday (before the introduction of single stock futures, the day was known as the Triple Witch). A modest price move and a surge in volume in the first hour of trading is common. The surge in volume can be the result of hedges or big orders in key stocks that can affect the opening prices of those stocks because there is a special settlement price calculated for the index futures and the special settlement price is the result of calculating an index value based exclusively on the opening prices of each of the components. Without headlines, the volume usually subsides after the first 40-60 minutes and much of the rest of the day can see sideways price action until late in the session when an intraday trend can unfold.
The University of Michigan's sentiment index for September will be reported near 9:45 a.m. ET. The Street expects something near 85.0 or 86.0; a weaker number could weigh on prices.
Wednesday's session produced readings that usually mean more downside to come. For Friday, there can be some options driven buying in the cash markets but that would probably not occur unless the VXO volatility index moves below 11.72. It would take a VXO move below 11.47 to suggest strong mechanical buying.
For days, the major equity indexes failed at key resistance levels and the markets probably need to regroup at lower levels. I think the markets are starting to become more concerned about the inflationary pressures created by energy prices.
• The Nasdaq has intraday resistance at 2158-2163; resistance is formidable at 2165-2186.83, and gets thick at 2177-2186.83. Resistances are stacked, the next layer of chart significance is 2201-2249. Resistance thickens at 2211-2233.
• S&P 500 resistance is formidable at 1229-1242.62. A combination of several intraday plateaus creates a focus of resistance at 1238-1242.62. The next focus of resistance above 1245 is 1249.23-1267.
• Nasdaq intraday support is 2147.31-2139 (intraday charts). An additional leg lower is expected, but that might not occur until Monday.
• The next layer of well defined Nasdaq support is 2131-2112.25. The Nasdaq's support at 2106-2039 is a critical support level that if broken would open the downside for sub 2000 prints. Inside the 2106-2039 support layer, there is a focus of support at 2106-2076 and this is still a likely spot for the markets to attempt a stand.
• Chart pattern studies I have done suggest that if the Nasdaq has a close below the 2146 level, additional downside is likely.
• The S&P 500 has opened the intraday risk for a test of the 1222-1215 area. Next support is 1206-1165 with a focus of support at 1206-1183. This is a very strong layer of support and if it were tested, I would still expect it to hold on the test. If the index experiences a close under 1218.02, a retest of 1206-1195 area would be expected.
Cherney is president of Cherney Market Analysis