Bullish Tone in Place

One positive aspect: the volatility index hasn't beat its 10-day moving average

By Paul Cherney

This week, the Investor's Intelligence sentiment poll of newsletter writers posted a "bearish" reading of 24.4%. Since 1987, there have only been 14 periods of time that the Investor's Intelligence "bearish" reading have been at 25.0% or lower. I looked at price performance for the S&P 500 during the consecutive weeks when the "bearish" reading stayed at 25.0% or below. The most important observation is that historically, the S&P 500 has demonstrated an inability to post significant trending gains while the "bearish" reading is 25.0% or lower.

I took another look at price performance in the S&P 500 with the "bearish" reading was at or below 25.0%. I looked at the best and worst closes for the S&P 500 during the time after the first reading of 25.0% or lower was registered. There was only one advance of more than 3.03% (a close-to-close percentage gain) that could be established. That was a 6.12% gain in 1991 which was right after Gulf War I. A gain of that magnitude for the current market would mean a close for the S&P 500 of 986.51. Other than that, the biggest gain was a 3.03% gain, which would equate to a close of S&P 500 960.30, curiously close to the upper edge of the 944-965 resistance that was established by the August 2002 highs.

At this point, the price trend remains positive and until it demonstrates the ability to break below supports, the line of least resistance is higher. The one aspect of the current market that keeps a bullish tone in place is the inability of the VIX to rise and exceed its 10-day exponential moving average, which was 23.56 near Friday's close of trade. Another aspect of the current markets that is a positive is the high Put/Call ratios at the CBOE.

The Nasdaq's immediate resistance is 1522-1531.82, next resistance is 1543-1595 with a focus 1547-1568.

The S&P 500 has immediate intraday resistance 931-935.05. The price action surrounding the highs in December 2002 and January 2003 for the S&P 500 has created some pretty consistent resistance in the 930-935.05.

The next resistance (established in August of 2002 and the beginning of July of 2002) is 944-965 with a focus 951-957. The resistance starts really at 939 but it does not become organized (consistent sideways price action) until 942-965, especially strong resistance with prints of 951-957.

Immediate support for the S&P 500 is 924-918 then 915-910.

Immediate support for the Nasdaq is 1496-1486, substantial support is 1482-1451.

Cherney is chief market analyst for Standard & Poor's

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