Negative Conditions for Stocks

The markets have probably started a protracted correction

By Paul Cherney

The technical condition of the markets is negative.

On a short-term basis, an oversold pop could occur at anytime, but the markets have probably started a protracted correction which could see the S&P 500 print under 950, maybe a retracement to the 930-910 area. Other technical conditions might change this view, and short-term oversold rebounds are always part of such a decline, but these markets have not seen a one-third or a 50% retracement for the move up since March's lows, and retracements like that are common.

Odds have increased that the next S&P 500 support under 974, which is 970-962.10, will probably give way, although it is not uncommon for the first prints below or near such a level to attract buyers, those buyers might only be bears insuring themselves short-sided profits by buying to close out short positions. Their buying might only last a day.

Resistance: Overhead resistance has proven itself to be formidable.

The Nasdaq has immediate intraday resistance at 1692-1711. The Nasdaq has major resistance: 1722-1758. Inside this layer of resistance is a focus of resistance at 1737-1753.

Immediate intraday resistance for the S&P 500 is now 973-980, then 984-991. The S&P 500 has brick-wall resistance at 988-1015.41. Its focuses of resistance are 993-1000, 1005-1008, and 1010-1015. 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.

Supports: The S&P 500 has registered a close below an important layer of support which was 988-974. The next support is a thin shelf at 970-962.10; I expect it to fail and prices will probably have to test 949-912 support. This scenario would not have to unfold one trade day after another, (not necessarily down, down, down every trade day), as short-term oversold rebounds in price are natural.

The Nasdaq has immediate support at 1686-1653. An important level on the chart is 1675. If prices undercut 1675, downside risk would open for a test of the lower edge of the 1686-1653 band of support, but ultimately, the odds would increase for a move to 1648-1597. The bigger picture for NASDAQ support is that inside 1699-1653, there are multiple layers of support; there is a focus of support at 1682-1664. Due to the nature of the rise since the March lows, Nasdaq supports are stacked; the next support is 1648-1597.

Cherney is chief market analyst for Standard & Poor's

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