A Matter of Conviction
By Paul Cherney
On Wednesday and Thursday, the markets experienced a short-covering rally. Buying is created by 3 factions: 1) bears covering short positions to book profits, 2) momentum players jumping on the backs of their bearish brethren, and 3) some longer-term investors step in to do some bargain hunting.
Wednesday and Thursday's price action satisfied the buying demand of the bears covering shorts and then the momentum players probably started taking profits on Friday so two of the three legs of the buying stool were eliminated. If the longer-term investors are not convinced that there is some sort of relative value in equities at these prices, then there will be no one to support prices and declines will exceed the lows seen in Wednesday's market.
It is natural for the market to retrace some of the gains generated by a short-covering rally, but if buyers don't step to the plate to prevent prices from closing beneath the lows that generated the short-covering, then price patterns could easily turn sideways to lower and require time to establish a base of prices before anything meaningful to the upside can unfold.
A positive trend could unfold from the short-covering rally if the retracement finds buyers at price levels higher than Wednesday's lows and then those buyers force prices above the immediate resistance levels mentioned below.
The Nasdaq has intraday support at 1923-1901, then 1894-1874. It would be unhealthy for prices to move below the 1894-1874 level. Wednesday's low print was 1851.49.
The index has considerable resistance at 1942-1985.83, with the first focus of resistance 1942-1966 -- and that is still a major stumbling block as proven in Friday's session when the Nasdaq printed a high of 1942.15 and then turned lower. There is a very thick layer of resistance at 1966-1986 and then stacked right on top of the 1986 there is resistance at 1977-2018 which makes the 1977-1986 level a focus of resistance.
The S&P 500 index has immediate support at 1123-1116. The index has resistance at 1126-1139.50. The next layer of resistance is at 1152-1177 with a focus 1156-1164.
The "500" has well defined intermediate term support in the 1111-1052 area. There is a focus of support inside this region at at 1094-1080. Wednesday's low print was 1081.66.
Cherney is market analyst for Standard & Poor's