Ready For A Short-Covering Rally

A lift from extreme lows often entices more buying from bears buying in open short positions to book profits

By Paul Cherney

Wednesday's price action was encouraging because the major indexes lifted (substantially) from intraday lows.

It was the first time since trading resumed that there was an air of "fear in the marketplace" as prices in the NASDAQ dropped below 1461 and prices in the S&P 500 fell below 986, (both levels were mentioned in yesterday's end-of-day comment). This is usually a good sign that some short-covering should take place.

The intraday price pattern (down, then further down, then a reversal), often precedes a day of short-covering because what the price action suggests is that many sellers were satisfied (sold), AND, that prices reached levels which enticed some bargain hunters off the sidelines. A lift from extreme lows often entices more buying from bears buying in open short positions to book profits.

We've already had virtually all the signs coincidental with the beginning of a short-covering rally, it is only a question of getting the bears scared enough to start aggressively covering open short positions.

Immediate resistance for the NASDAQ is 1545-1568.22 then 1582-1604. Immediate support is 1501.96-1491.80. The next support overlaps at 1497-1461.97.

Immediate S&P 500 (based on end of day data bars) is 1020-973. The index has another layer of support which is 986.25 - 926.85. There is a focus of support 986-968, Wednesday's low print was 984.62.

At this point, any lift in prices would only be considered a short-covering rally, they usually last 1 to 4 trade days, and these markets are overdue.

Cherney is market analyst for Standard & Poor's