Upside Appears Limited
By Paul Cherney
The rebound in prices Thursday was the product of an extremely oversold market condition. In Wednesday's overnight systems run, the oversold signals generated usually mean two things: 1) the next day (in this case, Thursday) usually sees closing gains; and 2) the rebound in prices usually does not generate a "never look back" shot to the upside. Usually, after the first rebound, there is some sideways action which follows -- some sideways base-building.
One aspect of Thursday's markets which lends itself to assuming a short-term degree of limited upside expectations is that the rebound did not generate volume greater than the volume seen on Wednesday. Simply stated: Thursday's higher prices did not attract more buyers than Wednesday's selling. The total trading volume dropped on Thursday for both the Nasdaq and the NYSE (when compared to Wednesday's volume).
There was so much "good" positive momentum generated by the recent breakouts above the trading ranges that there should be a residual positive effect that should prevent prices from making a dramatic drop. And the ranges established in June, July, and August themselves represent substantial technical support, but on a very short-term basis (next couple of days), sideways hesitation would be natural based on the short-term oversold signals generated in Wednesday's overnight systems run and the psychological weight of the earnings confessional season.
The S&P 500 has a focus of immediate support at 1,015-1,008. The Nasdaq's immediate support is 1,825-1,799.
Immediate Nasdaq resistance is multi-layered, which is why a substantial jump higher does not appear likely right now. Remember, on Wednesday, the 1,846 level was the break-point for additional downside, so technically immediate resistance starts with prints of 1,846 and higher. The next well-defined resistance (intraday) is 1,853-1,859.21.
The S&P 500 is inside the 1,015.87-1,021.51 layer of resistance, the next well-defined layer is directly overhead at 1023-1026.76.
The Nasdaq has immediate resistance at 1,853-1,859.21, then 1,874-1,893; this layer of resistance is based on intraday trading (60-minute bars) from March 18 and 19 of 2002. The further back in time you go, the less important short-term intraday price ranges become but this market has not moved above the 1,893 level intraday.
The Nasdaq has a price gap created by the opening on March 12, 2002. These are hourly charts and the gap runs 1,899.01-1,928.12. Quite often, the first test of a price gap brings sellers to the markets.
S&P 500 resistance (daily bar charts) was established by price action in June, 2002; it is 1,008-1,041, with a focus at 1020-1031. The index has been unable to close above the 1,031 level. The next resistance is big at 1,048-1,107, from March, 2002. Two different measures of the potential upside for the current break above the 1,015 level target 1,047 and 1,070 as potential upside prints.
Immediate support for the S&P 500 is 1,015-988 with a focus at 1,015-1,008.
On a pure chart basis, the Nasdaq's breakout of its trading range has created the potential for a test of 1,912-1,954, The S&P 500 has the potential to print 1,047-1,070. There is no time frame for these potential moves.
Cherney is chief market analyst for Standard & Poor's