Ready for a Bounce?

Wednesday's price action looks like a set-up for a drop Thursday morning -- which may prompt some short-covering

By Paul Cherney

When markets close at or near the lows of the session, opening strength on the following trade day usually does not see follow-through higher (unless there is a universally recognized bullish headline); prices usually have to retrace and spend a few minutes in negative territory (at the least). So if there is opening strength on Thursday, but no significant headline, the opening move should lose upside momentum within the first 30 minutes of trading.

But a plunge at the open after a day like Wednesday can find buying support as bears who have been long, use the extra dip in prices as an invitation to make the cash register ring (start to buy to cover outstanding short positions).

Right now, today's price action looks like a set-up for a drop tomorrow morning which clears out enough sellers to prompt some short-covering but I will defer to the intraday measures for some sort of confirmation in tomorrow's session.

The daily total volumes for the NYSE and the Nasdaq indexes were nowhere near capitulation levels today.

The CBOE Put/Call Ratios were nowhere near capitulation levels which tells me that any lift from the lows set tomorrow, will probably not find significant follow-through higher unless there is a headline of major bullish importance (doubtful). Short-covering advances have lasted 1 to 2 trade days lately.

The S&P 500 has undercut the spike low registered on Oct. 8, 1998 (which was 923.32). The index is inside a broad layer of support which runs 986-893 and was established during the months of July 1997 through Jan 1998. I think any prints in the 906-896 area are going to bring short-coverers to the market to start their profit-taking (buying to cover open short positions which will lift prices).

Both the Nasdaq and the S&P 500 are in likely spots on the charts for at least some sort of short-term stabilization of prices. But the trend remains down, until there has been technical evidence that a bottom is in and that an uptrend has started.

There has been a pretty consistent pattern in intraday prices which has preceded days of gains, and there is a possibility we could see it on Thursday. I would want to see a drop at the open, an attempt to lift (intraday) which fails, a move to new lows and then a lift in prices which creates closes which are at or above the open for the session. I would want to see the VIX (volatility index) finish the session under 36.00 to boost confidence that a single day of gains could follow.

Cherney is chief market analyst for Standard & Poor's

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