Short-Covering Rally Running out of Gas?

The key to whether this short-term advance is drawing to an end: trading volume

By Paul Cherney

If a typical short-covering rally lasts one to four trade days, Wednesday, Mar. 28, will represent the fourth day for the DJIA and the S&P 500 while Tuesday was the fourth day for the Nasdaq.

I have to assume that the short-term trend (positive) will remain the dominant theme until or unless some other technical condition enters the markets.

Here's what I'll be watching for (to help me get a handle on whether we are really running to the end of the short-term advance): a contraction in volume to 0.8 times the 50 day moving average of volume while the price range for the trading day also contracts (it dowesn't matter whether the index finishes higher or lower on the day). The smaller volume would mean that there are fewer people coming to the party and the smaller range would represent uncertainty as few are willing to commit at higher and higher levels.

For the Nasdaq, 0.8 times the 50 day moving average of total trading volume is 1.66 billion. For the S&P 500 (using NYSE total trading volume), the number would be 960 million.

The Nasdaq has broken above 1930-1770 band of support. Immediate resistance (above 1975) is directly overhead in the 1987-2031 area and this is a likely spot for this index to run into a profit-taking stall, but I don't hesistate to include that technical measures based on end of day data remain positive, that's why I will be paying close attention to price and volume action. Immediate support is 1966-1940.

The S&P 500 is at the upper edge of a band of resistance which runs 1136-1190. 1150-1138 is immediate (intraday) support. On Tuesday, the S&P 500 closed at the upper edge of a focus of resistance which is 1158-1182. The S&P 500 has a shelf of resistance 1196-1216. Major resistance (likely to be impenetrable on a first assault) is 1230-1266.

Note: I did have a signal trip as of the close on Thursday (3/22/01) which historically has very high odds that the current advance in the S&P 500 will ultimately rollover and undercut the 1117.58 level on a closing basis. But I haven't seen the evidence that this advance has run out momentum (which is in addition to the fact that the signal could just be wrong). This signal usually sees the undercut within 6 weeks. I also had another signal that the oversold condition in the S&P 500 should garner close to a 15 trade day advance so I am not thaqt anxious to try to call the top and a retracmeent which undercuts 1117 just yet.

Cherney is Market Analyst for Standard & Poor's

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