A Positive Picture for Stocks

Technical improvement in momentum measures and late-session strength on Tuesday suggest higher prices on Wednesday

By Paul Cherney

Momentum measures based on end of day data for both the Nasdaq and the S&P 500 have managed to move up into positive territory. This is an improvement from readings which were neutral with a positive bias.

The S&P 500 has moved into an area of thick resistance which has capped prices for two months, but the technical improvement in the momentum measures and the strength near the end of the session on Tuesday suggest higher prices on Wednesday. The thick resistance for the S&P 500 is 1008-1015.

The Nasdaq managed to close above the 1758 level, which now converts 1758-1722 to support.

In Tuesday's market, the S&P 500 followed the price pattern which normally follows the overbought signals generated during Monday's session, but the Nasdaq did not, which I have to interpret as a short-term positive.

Immediate downside risk (worst case) looks limited to S&P 500 prints 991-984 or Nasdaq prints 1743-1726.

Resistance: The Nasdaq had major resistance at 1722-1758, but the index closed above that level on Tuesday, which converts it to support. Technically, a case can be made for resistance all the way to 1776.10, but there simply is not enough price traffic in the 1758-1776 area to label it strong resistance. The next layer of organized resistance (above 1758) is 1778-1829.58. There is a gap in the price chart which runs 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.

Immediate resistance for the S&P 500 is 1004.59-1015.41. Its focuses of resistance are 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 at 1020-1031. If you look at the overlap of resistances, the 1008-1015 layer is a stumbling block for S&P 500 prices.

Supports: The S&P 500 has support at 991-984, stacked at 985-974 and 976-960.84. I cannot rule out that sometime before the middle of September that 949-912 support will be tested, but for right now, price action is positive. The S&P 500 still technically has a small chance of printing under 950. 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, but in the short-term, it looks like prices should move higher.

The Nasdaq has a broad layer of support at 1758-1722. The index has a shelf of price traffic at 1753-1737 which has to be considered a focus of support. The Nasdaq has stacked support 1736-1711, 1703-1695, and 1694-1681.31.

Cherney is chief market analyst for Standard & Poor's

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