A Reversal in Store?

Tuesday's chart patterns may signal a drop in prices at the open on Wednesday -- which traders may view as a buying opportunity

By Paul Cherney

Tuesday's intraday chart patterns look like a set-up for a drop in prices at the open of trading on Wednesday. I think the markets will view the drop as an intraday buying opportunity. I used to call this day "a.m./p.m. reversal day" because quite often, the opening move for prices ("a.m. action") can reverse later in the day ("p.m. action"). If the indexes open sharply lower, prices might not be able to reverse into positive territory, but I would expect them to recapture much of the opening loss.

This is the week of the December Triple Witch -- when the monthly stock and index option expirations coincide with the quarterly expiration of futures contracts. The chances of huge moves during the week of the December Triple Witch are slim. I looked at the percentage changes on a closing basis for the individual trading days of the week of only December Triple Witches. (Based on price action in the S&P 500 from 1986 to September, 2002).

Here are the days of the week and the historically demonstrated chances of gains or losses of 1% or higher. These odds are based on Q4 Triple Witches only:

Mondays, 3 in 10 odds (31% of the time, the close of the S&P 500 has represented a price change of greater than 1% in either direction),

Tuesdays & Wednesdays, 1 in 10 odds (12.5% of the time),

Thursdays & Fridays, 3 in 10 odds (31% of the time).

The odds are stacked against big closing gains or losses in S&P 500 prices during the December Triple Witches.

The VIX's (market volatility index) move back below its 10-day exponential moving average keeps a positive background in place. On Tuesday, near the close, the VIX's 10-day exponential was near 31.23.

Support: The S&P 500 has multiple stairsteps of support, which makes a dramatic decline unlikely. Supports include 897-887, then 884-867. There is considerable price traffic (support) in the 883-875 area.

Immediate support for the Nasdaq is now 1393-1385, then 1375-1367 and 1347-1317.

Resistance: The S&P 500 has resistance at 932-965. Immediate intraday resistance is 915-926.27 and 932-944. The first move into the 915-926 area might run out of momentum without a headline of undeniably bullish importance to bolster confidence.

The Nasdaq has immediate resistance at 1381-1412, then 1407-1426, which makes the 1407-1412 area a focus of resistance. Due to the price action of Dec. 4 through Dec. 6 there is a well-defined ledge of resistance at 1411-1430.12, and this area will probably rebuff the first test (unless there is a headline of undeniably bullish importance). Higher prices by the first two trading days of the year seem very likely, but the first test of this area might cause a stutter in the Nasdaq.

Cherney is chief market analyst for Standard & Poor's

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