Signals Remain Negative

Wednesday's session started prices in the right direction for a potential shakeout

By Paul Cherney

End-of-day indicators for both the Nasdaq and the S&P 500 are negative.

The VIX (market volatility index): If the VIX prints below 37.17 then the markets have a positive background, but if the index moves below 37.17 and then reverses to move higher, this will probably coincide with weakness in stocks.

The Iraq situation and the uncertainties of a terrorist incident represent too much psychological overhead for the markets. Without a headline of resolution, the markets are probably going to need some sort of a shake-out, an event which forces the fence-sitters who have only been waiting for rises in price to exit long positions to jump into a sell mode, forcing prices lower and giving bearish traders an extra short-side margin of profit which is simply too plump to ignore.

I do not have any technical measures to suggest that a shakeout (short-term, sometime in the next 3 trade days) is going to happen, or that it will represent a short-term rebound point for a lift in prices, but a shakeout would probably push multiple short-term indicators to oversold levels which would at least increase the chances for a rebound, even if it is only fed by bears taking profits in short-positions and some momentum players jumping on for the ride.

Wednesday's session started prices in the right direction for a potential shake-out. If the S&P 500 could print 806 or lower and the VIX shot up to the 40.78 to 42.12 area and then reversed course and managed to trend below 40.00 (preferably moving all the way back down through 39.31), then I think that would increase the odds that at least an intraday shakeout had taken place.

There have not been enough indicators hitting oversold to suggest that the technical condition of the markets can simply overlook or ignore the weight of the Iraq situation. The markets will probably need a headline which specifically advances (favorably, or interpreted favorably) the situation with Iraq in order see anything (even just short-term) meaningful to the upside.

These markets remain susceptible to headlines both good and bad. Sentiment can turn in an instant forcing leveraged players to cover and enticing longer-term investors to try the long side, but any violent upside move in prices will probably only be a short-term affair until something more definitive unfolds with regards to Iraq.

The Nasdaq is testing immediate intraday support of 1287-1275. The next support is 1240-1160. If the Nasdaq prints in the 1267-1265 area, it will have retraced 61.8% of the gains seen from the October lows to the December highs, and that would increase the chances for retest of the supports established at the October low. I view that support as 1180-1108.

The Nasdaq has intraday resistance 1290-1301. The index has a well defined shelf of resistance at 1302.80-1315. Immediate resistance above 1315 is 1333-1345.

The S&P 500 has intraday resistance at 823-836 and the 832-835.72 area is a focus of resistance. More substantial resistance is 838-845.88.

Immediate S&P 500 support is being tested, 827-817. The next chart support is 806-792.

Cherney is chief market analyst for Standard & Poor's

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