Keep an Eye on Interest Rates

The price action in the 10-year Treasury note will probably dictate price action in the short-run for the S&P 500

By Paul Cherney

The technical condition of the market remains negative, but the S&P 500 is no longer displaying downside momentum. The halt in the descent has coincided with an oversold rebound in the 10-year Treasury note, and the price action in the 10-year will probably dictate price action in the short-run for the S&P 500.

Higher 10-year yields, yields which surpass the 4.37% level, will probably coincide with weakness in the S&P 500. You can monitor 10-year yield under the ticker TNX, just mentally move the decimal point for this index one place to the left for the nominal yield on the 10-year Treasury.

Even though the current weakness has lost downside momentum, there is still downside risk for S&P 500 prints under 950, maybe a retracement to the 930-910 area. These markets have not seen a 1/3 or a 50% retracement for the move up since March's lows, and retracements like that are common.

It would take a NASDAQ close above 1675 (1689.15 also has signficance, see note below) and/or an S&P 500 above 985.75 to raise questions about concerns for an S&P 500 test and possibly a close in the 948-912 area of support. End-of-day chart patterns of indicators based on combinations of price change, volume and breadth suggest that even a counter move (a drift higher) for as many as three more trade days probably will not garner significant followthrough to turn prices higher for an upleg which breaks out to the upside.


  The NASDAQ has immediate intraday resistance 1666-1675.46, an intraday move above 1675.46 should generate followthrough for a test of the next layer of resistance which is 1687-1723 with a focus 1695-1703. The NASDAQ has major resistance: 1722-1758. Inside this layer of resistance is a focus of resistance 1737-1753.

I think it would take a headline universally recognized as bullish to move prices up to the 1690 or higher area. I have a pricing model which is projecting that NASDAQ 1689.15 is a potential pivot point, meaning a close above this level would increase chances for an extension higher.

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

The bigger picture of resistance which was established by price action in June of 2002 is that the S&P 500 has a band of resistance 1008-1041 with a focus 1020-1031. If you look at the overlap of resistances, the 1008-1015 layer is the immediate stumbling block for S&P 500 prices.

Regardless of whether the S&P 500 drops over the short-term, the trading range we are currently in could last for some time. This year's June quarter (2003) saw the S&P 500 gain 14.9%. I have looked at quarterly performances for the S&P 500 following a quarter in which the index had gained 10% or more.

If you averaged the closing gains and or losses for the quarter following a 10%-plus quarter, the average was a gain of 4.01%, which would equate to a close of 1014 for this year's S&P 500 as of Sept. 30, 2003. So far this quarter, the intraday high print for the S&P 500 has been 1015.41, very close to the average historical gain demonstrated for the entire quarter.

If you looked at each quarter following a 10% quarter and took the highest price that the S&P 500 achieved during each one of those quarters and you averaged all those "best" percentage gains, the average is a gain of 6.2%, which for this market would equate to an S&P 500 print of 1035.

If you took all the "worst" percentage closes and averaged them, (to give guidance for what the average downside risk is), the average loss to the worst close of the quarter was a loss of 3.34%, which would equate to a close for the current S&P 500 of 941, just at the top edge of 948-912 support.

So far, this market is acting well within the envelope of normalcy.


  The S&P 500 has a thin shelf support 970-960.84. I still expect this level of support to fail and prices should test 949-912 support. This scenario does not have to unfold one trade day after another, (not necessarily down, down, down every trade day), short-term oversold rebounds in price are natural.

The NASDAQ has a focus of immediate support 1643-1623, this is within the broader 1648-1597 layer of support. Friday's close has satisfied minimum expectations for a close under 1648, that does not necessarily mean that prices have to rise, but they have reached price levels where it would be natural to see some short-term basebuilding or an oversold rebound.

Cherney is chief market analyst for Standard & Poor's

Before it's here, it's on the Bloomberg Terminal.