More Downside Possible

As long as the VIX (market volatility index) remains below key levels, the markets are ripe for some profit-taking

By Paul Cherney

As long as the VIX (market volatility index) remains below its 10-day exponential moving average it is inappropriate to suggest that a short-term correction has started, but the markets are ripe for some profit-taking. Some profit-taking on Monday would be natural.

Near Friday's close, the 10-day exponential moving average of the VIX was 22.40. Usually, when the VIX crosses back above its 10-day exponential moving average, equity prices suffer.

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

The S&P 500 has a focus of resistance at 947-957 (daily charts).

Reluctance to expect a huge trending move higher in the markets at this time is in part based on the historical price performance of the S&P 500 when the percentage of "bearish" advisers (%bears) in the Investor's Intelligence weekly survey is less than 25.1%. Historically, the odds have been that 64% of the time, the S&P 500 has experienced a close which represented a loss of over 2% from the day that the %bears moved under 25.1% 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 (Wednesday, May 7). If you averaged all the "worst" closes experienced during the prior 14 occasions, the average worst closing loss was a loss 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 939-929 with a focus of 934-930.

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

Cherney is chief market analyst for Standard & Poor's

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