A Short-Term Capitulation?

A rush to sell is possible Wednesday -- and could set the stage for a short-term rebound

By Paul Cherney

The 4:00 pm EST CBOE Total Put/Call ratio was 0.97, the Equity Only Put/Call ratio at 4:00 pm EST was 0.81. These are near levels which can spawn a rebound. Unless there is an undeniably bullish headline overnight (doubtful), then price action on Wednesday should see prices dip again in the morning.

I have no way of knowing how many people may have gotten into margin trouble with Tuesday's price decline, but a rush to sell is certainly possible and that has the potential to create some sort of a short-term capitulation and rebound. I have no definitive indication that this will happen but we had capitulation style volume in the Nasdaq and lopsided put/call ratios at the CBOE which increases the chances that the lows for the day (Wednesday) could occur before 12:30 pm EST. This is not a call for a trend reversal; the trend remains down, but just as bull markets can't go up everyday, bear markets can't go down everyday, either.

Some selling in the morning and prints in the first layers of support mentioned below could spark a round of profit-taking by bears (buying to cover open short positions) which brings prices well off their lows and possibly into positive territory.

The next layer of support for the Nasdaq is 1654-1570, which is inside the 1700-1461 area of consolidation which is apparent on a weekly chart of the Nasdaq and dating from October through December of 1997.

Immediate Nasdaq resistance is 1707-1734 with a focus 1717-1729. The former support must now be considered resistance: 1770-1930.

Immediate S&P 500 resistance is 1120.98-1131.55 with a focus 1123-1127. Major S&P 500 resistance is 1136-1190.

Immediate support for the S&P 500 is 1100-1081.19 (the low print from 3/22/01). The next layer of substantial support below 1081 is 1066-960.

Note: On Thursday Mar. 22, I had a signal trip which historically has very high odds (5 out of 5 since 1986) that the S&P 500 would undercut the 1117.58 level on a closing basis. Technically, that signal was satisfied by Tuesday's S&P 500 close at 1106.44. This does not necessarily mean that the market will move higher, all it has done is satisfy the expectation that prices would move below and close below the price registered on the day of the signal. This is indicator is now 6 for 6 since 1986.

If you would like to look at the other times it has fired in an attempt to discern if there are any implications for the ensuing price action, here are the dates of the previous signals: 10/27/1987, 11/7/1997, 9/4/1998, 5/12/2000, 12/29/2000, 3/22/2001

Cherney is Market Analyst for Standard & Poor's

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