Downside Appears Limited

The VIX (market volatility index) is probably going to have to stay below key levels for any rebound to happen Thursday

By Paul Cherney

There are multiple technical crosscurrents for Thursday's session.

Upside appears limited, and for Thursday, downside appears limited and might generate a rebound in prices. But the VIX (market volatility index) is probably going to have to stay below its 10-day exponential moving average if that is going to happen (a rebound from short-term oversold). If there happens to be opening weakness in stock prices on Thursday, the VIX will probably move above the 23.00 level. If buyers move into equities and force a reversal of early weakness, expect the VIX to come back down and it looks like it would have to at the least move below 22.94 to act as confirmation of a rebound. Preferably it should move below 22.00.

The movements in the VIX do not always negatively correlate with stock index prices, but if prices are in a rebound and this measure of volatility is dropping, that is usually a good sign.

Near Wednesday's close, the 10-day exponential moving average of the VIX was 22.94. Usually, when VIX moves back above its 10-day exponential moving average, equity prices suffer.

Like Thursday of last week (Nasdaq) when I thought any opening weakness on Friday morning would be viewed by the markets as a buying opportunity (short-term), I now have similar intraday indications of oversold for both the Nasdaq and the S&P 500. Intermediate term indicators based on 60-minute bars are now oversold, except for one, which was the case last Thursday, when I thought that any early weakness on Friday would be seized upon by buyers, but the markets popped higher at the open, and then really did not look back.

There was a headline which forced the buyer's hands at last Friday's open: nVidia's (NVDA ) announcement that it expected better sales. This put buyers in command right out of the gate. Another headline might do that for stocks on Thursday, but for now I would expect that there should be some slightly lower prices in the morning.

The Nasdaq has a focus of resistance at 1547-1568 (daily charts).

The S&P 500 has a focus of resistance at 951-957 (daily charts).

Studies of price action in the S&P 500 greatly limit expectations for any sort of a sustained trend higher due to the percentage of "bearish" advisors (%bears) in Investor's Intelligence weekly poll remaining under 25.0%, and as of Wednesday the % bears is still under 25.0%. There is an aspect of this price study which I feel obliged to address: Of the 14 prior times since 1987 that the %bears have been below 25.0%, nine of those times saw the worst closes during the sub 25.0% readings reach a loss of 2% or more. That means that historically, the odds have been 64% of the time that the S&P 500 has experienced a close which represented a loss of over 2% from the day that the %bears under 25.0 was announced. So far, the current market has seen a closing loss of 1.01%, which occurred on the day after last week's Wednesday announcement. If you averaged all the "worst" closes experienced during the prior 14 occasions, the average worst closing loss was a drop of 2.35%; for the current S&P 500, that would equate to a close of 907.77. History never repeats exactly, but this is a consideration. If the VIX starts a trend back above its 10 day exponential, S&P 500 prints under 910 could become a reality.

The Nasdaq has immediate resistance at 1543-1595, with a focus of resistance at 1547-1568.

The S&P 500 has immediate resistance (established in August, 2002, and the beginning of July, 2002) at 944-965, with a focus of resistance at 951-957.

Immediate support for the S&P 500 is now 939-929, with a focus of 934-930.

Immediate support for the Nasdaq is 1532-1510, with a focus of 1525-1515.

Cherney is chief market analyst for Standard & Poor's

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