Advance Losing Momentum

But strength in Friday's jobs report or ISM index could produce another round of buying

By Paul Cherney

The technical conditions of the markets is neutral. The advance is losing momentum but strength in the nonfarm payrolls or the ISM index could produce another round of buying in Friday's markets.

Thursday's price action was a confirmation of the formidable resistance directly overhead for both the Nasdaq and the S&P 500. The chances appear real that even if the numbers impress on Friday, the upside might be short-lived, fueled by a short squeeze; those rallies tend to last as few as one, as many as four trading days.

There was an aggressive institutional seller of index futures in both the morning and the afternoon on Thursday. It's anyone's guess as to whether that might have been some sort of a hedging activity, but that action does not diminish expectations that strong numbers in the nonfarms or the ISM index will push equity prices higher.

The VIX (market volatility index) is wobbling and has moved back above its 10 day exponential moving average (usually not healthy when the VIX is moving higher, away from its 10 day exponential), but some of that volatility no doubt was directly related to the peculiarly obvious, heavy-handed (institutional) selling in the index futures pit. The selling looked like an attempt to "run the stops" on the way down. (I have seen days like this do an absolute about-face in the following session.)

Very near the close of trading on Thursday, the VIX's 10 day exponential moving average was 20.84, the VIX closed at 21.24. Generally, a move above the 10-day is coincident with declining equity prices and a move below it is coincidental with rising equity prices

The VIX will probably have to move below 20.23 to suggest that bulls are taking control on Friday.

On Friday, the July employment report and the ISM index will be released. The Street is expecting nonfarm payrolls to be up only slightly, 5,000. The Street expects the July ISM index to move up to 51.50 from June's 49.8. Numbers stronger than expectations should force equity prices higher unless the 10-year bond yield surges to the 4.79% or higher level, then there could be real fear that the abrupt reversal in interest rates will choke-off the recovery in the economy.

The underlying story of large short-interest at the Nasdaq should keep a floor under prices and anytime there is a dip, bears closing out of short positions could easily prevent prices from dropping very far, but if there is another surge in equity prices, some of that buying has to be short-sided traders covering short-sided positions, and their buying influence might be used up in the short-run.

The potential for a break lower in prices would come if the S&P 500 undercuts 976.04-974.00, or in the short-term, the potential for a little break lower in the Nasdaq would be in place if the Nasdaq undercuts 1710, that would open downside risk for Nasdaq prints 1699-1685. The bigger concerns for a leg lower would not come unless the Nasdaq undercut the 1675 level. Due to the nature of the advance and the price action in June, there is considerable Nasdaq support 1686-1597, so it is difficult to make a case for a plunge.

Resistance: Overhead resistance appears formidable.

The Nasdaq is testing big resistance: 1722-1758. Inside this layer of resistance is a focus of resistance at 1737-1753. This is strong resistance which was exceeded briefly intraday on Thursday.

The next layer of Nasdaq resistance is 1778-1829.58, so it is sitting right above the potential breakout point of 1776.10. There is a gap in the price chart which runs from 1778.80 to 1796.46 it was created by a downward gap at the opening on Apr. 22, 2002. Sometimes the first print inside a gap like this will draw sellers, so if there are good numbers on Friday, the potential for a lift is real, and good gains should unfold, this would set-up the potential for some profit-taking next week (if Friday's numbers are good, there could be an exhaustion of the short-term buying demand represented by bears short of the market).

The S&P 500 is testing its big resistance at 988-1015.41. It's focuses of resistance are 993-1000, 1005-1008, and 1010-1015.

The S&P 500 has resistance at 988-1015.41. 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.

If you look at the overlap of resistances, the 1008-1015 layer is the immediate stumbling block for S&P 500 prices.

All the rest of the comment remains the same as yesterday's column.

Supports: Immediate intraday support for the S&P 500 is 991-984.85. The S&P 500 has an important layer of support at 988-974. If 974 is undercut without attracting buyers within just a few minutes, that would be a sign that the buyers are not interested at current levels and they are probably going to stand back, waiting for lower prices. This means that if prices spend time (more than 10 minutes) below 974, then I would expect the thin shelf of support at 970-964 to fail and that prices will probably have to test 949-912 support. This scenario would not have to unfold one trade day after another, short-term oversold rebounds in price are a natural phenomenon.

The Nasdaq has immediate support at 1720-1707 with a focus of support at 1715.781-1710. Additional supports are 1703.62-1695.20, then 1687.94-1675.18. The bigger picture for Nasdaq support is 1699-1653; there are layers of support inside this broad band including 1686-1653, with a focus of support at 1682-1664, the overlap of these shelves of support is 1686-1682, which should carry some importance. If prices spent time under this level, I think the odds would increase for a break below 1675 as described above. Due to the nature of the rise since the March lows, Nasdaq supports are stacked; the next support is 1648-1597.

Point of clarification: In Friday's column, I wrote that the markets might breakout (above recently established highs, meaning, the Nasdaq could break above 1776.10 and the S&P 500 could breakout above 1015.41), I think that is possible, likely even if/when there is a squeeze of the shorts. But, I would be concerned that the lift above recently established highs could be an exhaustion of short-term buying demand and if there were a breakout higher, I would increase my focus on possible flaws in the composition of the gains. I would also be paying close attention to the VIX, because a low VIX in and of itself is not a danger, but there is a potential for danger when the VIX starts rising.

Cherney is chief market analyst for Standard & Poor's

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