business

Negative Signals for Stocks

The Nasdaq now has downside risk for prints near the Dec. 31 support level of 1355-1327

By Paul Cherney

Indicators based on end-of-day data are negative for both the Nasdaq and the S&P 500.

In Friday's session, the Nasdaq printed under 1380, at 1377.40. Nasdaq 1380 represents roughly a 61.8% retracement of the gains seen from the Dec. 31 lows to the Jan. 13 highs. I view retracements as a poll of market participants; when a retracement hits 50%, for me, it's a toss-up as to whether prices will retest the lows that spawned the advance. When a retracement starts hitting the 61.8% slot, the bears are gaining the upper hand.

Since the Nasdaq has printed at the 1380 level (61.8% retracement), I am more inclined to think that regardless of short-term rebounds, that the Nasdaq now has downside risk for prints near the Dec. 31 supports of 1355-1327.

The 50% retracement of the Dec. 31 to Jan. 13 run in the S&P 500 is 901. During Friday's session, the S&P 500 undercut this level to print a low of 899.02. I think it's now a coin toss as to whether the Dec. 31 supports get tested. If the index starts printing near 894-892 (61.8% retracement), odds increase for a retest of the supports established Dec. 31: 878-869.

There is another advance in the markets which is suffering a retracement, and that is the lift from the Oct. 10, 2002, lows to the Dec. 2, 2002, highs. Here are those retracement levels:

For the S&P 500, a 50% retracement = 860, a 61.8% = 840. A print at S&P 500 840 would increase the odds for a return to the support established near the October lows, which I view as 806-768.

A 50% retracement for the Nasdaq would be 1315, 61.8% = 1267. A print at Nasdaq 1267 would increase the odds for a return to the support established near the October lows, which I view as 1157-1108.

Obviously, some sort of a peaceful resolution to the Iraq situation will bring buyers to the markets for a couple of days, but the real problem the markets have is corporate earnings growth, and a peaceful resolution of the Iraq situation is not really going to do anything for earnings. But it should produce a more positive psychological attitude, which can't hurt. Maybe non-tech companies will have better things to say about the potential growth of future earnings and investors who abandon tech stocks might move into other non-tech industry groups which might help sustain prices for the major indexes

Cherney is chief market analyst for Standard & Poor's

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE