Odds Favor Small Gains

Tuesday's price strength in the face of bad news was a positive sign

By Paul Cherney

Tuesday saw bad news (a drop in construction spending in May, and the ISM index for June below 50.0) unable to push prices through supports. That's usually a positive sign.

Once again, CBOE Put/Call ratios near the end of the trading day were at levels which would suggest only limited downside for Wednesday.

There is still so much short-interest in the markets that this condition may have created an irony -- that these short-sided bets might actually provide a floor for prices as bears use even small declines to simply get out of positions (by buying).

I looked at the last two trading days before the Independence Day holiday. I looked at S&P 500 data back to 1958. Odds favor gains, but small gains.

For tomorrow's market (the second-to-last day before the holiday), the historical odds have been that 27 out of 45 times (60% of the time) there were closing gains on the session.

There were only 9 times when the percentage change in prices for the day was greater than a 1% move in either direction. Four of the greater than 1% moves were negative, five were positive.

If you took all the gaining days for the series and averaged them, the average of the gaining days was +0.65%. That's about a 6.40 point move in today's S&P 500 market. If you averaged all the losing days the average was a loss of 0.61%.

Intraday indicators based on 60 minute bar charts are at levels which usually see some follow-through, maybe the average of the gaining sessions (+6.40 S&P 500 points) will occur.

Resistance: The S&P 500 has immediate intraday resistance at 984-995 and 993-1003, which makes 993-995 an especially thick area of resistance. Next resistance is 1010-1015.12. The bigger picture of resistance, which was established by price action in June, 2002, is that the S&P 500 has a band of resistance at 1008-1041 with a focus of 1020-1031.

The Nasdaq has immediate intraday resistance at 1641-1660.47 and 1658-1669, which makes the 1658-1660.47 area especially strong resistance.

Support: The Nasdaq has support at 1633-1621; stacked support is 1617-1598.92, then 1603-1584, making 1603-1598.92 a focus.

Immediate intraday support for the S&P 500 is still 982-972. Additional support is 970-960. Tuesday was a retest of the breakout point (965). There is a broad band of support 973-947.

Longer-term support for the S&P 500 is 948-927; for the Nasdaq, 1558-1478.

If the Nasdaq were to print below the 1621 level, the next layer of support looks good at 1618-1598.92.

The following is still true, even though I do not expect it to happen for the rest of the week unless there is a headline: If the S&P 500 were to undercut Monday's intraday low of 973.60, there is support right underneath this which is 973-947, with a layer of support at 973-960. A print of 965.00 would represent a retest of the bullish breakout which occurred at the end of May. Tuesday's low print was 962.10.

Cherney is chief market analyst for Standard & Poor's