Selling Should Subside

Weekly indicators signal that we are within 10 trading days of a low which should launch higher prices

By Paul Cherney

The following bullet points remain the technical reality for now:

• Since 1991, the S&P 500 has been lower in the week after a down Triple Witch week 11 out of 15 times (73%). That really only means that the odds are about 7 in 10 that the S&P 500 will close below last Friday's close which was 989.14. The market could go lower and rebound but still finish the week under 989.14.

• The historical performance of the S&P 500 in years when it has lost more than 5% from the end of March to the end of May is usually lower still in the second half of the month. The study I performed generated historical odds (on data since 1970) of 4 in 5 (80%) that the S&P 500 will finish the month of June below 1007.27.

I have weekly indicators based on the S&P 500 that are at oversold levels seen at or near major lows over the past 14 years, and for this reason I do not think that there is major and long-lasting downside risk. But, I cannot rule out that there could be one close for the Nasdaq and the S&P 500 below the intraday lows printed on Sept. 21, 2001. That would mean an S&P 500 close under 944.75 and a Nasdaq close below 1387.06. I think that prices like those would create or precede (next trade day) a capitulation and a reversal. It is always darkest before the turn.

The last time these weekly indicators (which combine price change with volume measures) hit their current levels were September, 2001, March, 2001, October, 1990, and December, 1987. Because this indicator is based on weekly data it will not pinpoint to the day the turn, but we are within 10 trading days of a low which should launch higher prices. In reviewing daily price action near these excessively oversold readings, I know that there can be some volatility and choppy up and down action.

Perhaps the markets need to experience a convincing selling capitulation with total trading volume on the Nasdaq above 2.5 billion shares and Total Put volume at the CBOE over 1,000,000 contracts.

Wednesday will produce another Investor's Intelligence sentiment poll. Currently, the newsletter writers are 40.8% bullish, 35.7% bearish. If the new poll comes out and the bearish percentage exceeds the bullish total, then we will be looking at a very similar situation to the shift that occurred on Sept. 19, the Wednesday in the week of the Sept. 21 lows. I think it is important to point out that even though the bears finally exceeded the bulls on that Wednesday (Sept. 19, 2001), the markets did not put in their low closes until 2 days later, on Friday.

If the VIX (volatility index) can drop under 29.57 intraday, it should coincide with a rebound in prices. Because of the nature of the psychology of the marketplace right now, I do not think that the first lift from lows can generate a "never look back" trend higher for the markets. It would be more important for the VIX to close below 29.57 (or whatever the 10day exponential moving average of the close for the VIX turns out to be as of Tuesday's close.

The Nasdaq has immediate resistance at 1449 to 1491, with a focus of 1480-1486. The next resistance is 1519-1538.36, then 1554-1595, with a focus of resistance of 1560-1570. The next thick resistance (above 1595) is 1620-1654.

The S&P 500 has immediate resistance at 994-1005.58, then 1010-1019, then 1025.93-1039.09. There is a focus of resistance at 1032-1037.80. There is thick price traffic at 1039-1047. The next resistance is 1065-1088.

Immediate Nasdaq support is all of the price range from Sept 21, 2001. The Nasdaq has additional support 1400-1200. I do not think the index (even if it sold off horribly) could manage more than one close below 1387.

Immediate intraday support for the S&P 500 is the entire price range from Sept 21, 2001. I do not think the S&P 500 could have more than one close below 944.75.

The September 21, 2001 price ranges have not been undercut. They are

• S&P 500 intraday high 984.54, intraday low 944.75, close 965.80

• Nasdaq intraday high 1454.04, intraday low 1387.06, close 1423.19.

Cherney is chief market analyst for Standard & Poor's

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