By Paul Cherney
I was wrong about a shake-out at the open on Thursday, the shake-out came in the afternoon and based on historical studies of the VXO volatility index (since 2002), odds are about 7 in 11 for closes above the open on Friday. Other measures on the VXO suggest that if the index can move below 14.41, the chances for bigger gains intraday improve.
The beginning of a protracted trend higher is not expected, but a bounce can unfold.
In the bigger time frame, the chances that Thursday's lows represent a V bottom are slim. There is probably going to have to be a basing process and until I see weekly measures of accumulation versus distribution either hit oversold, or show convincing accumulation, I will be reluctant to view rebounds as the beginning of a trend higher. I have been reviewing my weekly measures (even though they cannot be considered valid for signals until the entire week's worth of data is included in the calculations). So far, the most important measures are nowhere near oversold.
Short-term, we have seen capitulation style volume, and on a purely technical basis, I would expect a bounce on Friday, but it will be closes that undercut Thursday's closes on less volume and a smaller numbers of new 52 week lows that will bolster confidence in expectation for a low that can launch a trend higher that lasts more than just a few trade days.
On Friday, at 8:30 am ET, the employment report for September will be released. The Street expects a drop of 172,000 in nonfarm payrolls due to the effects of Katrina. The Fed's rhetoric lately has made it openly apparent that they plan to continue raising rates so a larger than expected loss in nonfarm payrolls has potential to prompt some more selling.
• The Nasdaq has intraday resistance 2089-2110.77, stacked at 2115-2127.24. Next resistance is 2139-2167.00 resistance gets thick 2149 and higher.
• S&P 500 intraday resistance is 1201-1210.34, then 1215-1222.
• The Nasdaq has support at 2106-2039; there is a focus of support at 2087-2070, this level was undercut briefly on Thursday. On Thursday, the Nasdaq printed a low of 2069.04, so, technically that price level is now the bottom edge of immediate support.
• The Nasdaq has thick, well defined support 2075-2050 which makes the 2075-2069 area strong short-term support.
• The S&P 500 has immediate intraday support 1206-1165 with a focus of support 1206-1183. In Thursday's session, the index printed a low of 1182.24, so that technically is the lower edge of this focus of support. (WHY? because buyers came in and bought at that level, preventing the price from moving lower.) This is a very strong layer of support and there should be a bounce (even though I think there is more to come in a basing process).
• Next meaningful S&P 500 support is 1173-1146.
Cherney is president of Cherney Market Analysis