Recipe for a Rebound

The ideal pattern for Thursday's session: A gap lower in prices at the open that satifies the remaining sellers

By Paul Cherney

There was big volume on Wednesday, Sept. 24, and a lot of sellers were satisfied, but I do not have the kinds of indicator configurations in the 60-minute bar charts which would boost my confidence in calling for an immediate end to the current selling. But, a one-day rebound on Thursday is possible.

If I could dictate the price action I think it would be better to see a shakeout in the morning, ideally a gap lower at the open which satisfies more fence sitting sellers (big volume) and then starts to turn around as bears book profits and short-term momentum players play the long side.

On a purely technical basis, a huge drop in prices does not seem likely due to the recent stairstep advance. Choppy, one day one way, one day another trading is still very possible. Prices were down Monday, up Tuesday, down Wednesday, if the pattern repeats then up on Thursday could unfold.

Immediate intraday support for the S&P 500 has broken but due to the stairstep advance there are multiple layers of support and the next one for the S&P 500 is 1,008-983. Support begins to get thick with prints of 1,004 and lower, and any prints under 998 should attract some bears covering short positions.

But the volume patterns now might be changing and a rebound in prices on Thursday will probably not represent an about face which just sees prices chugging higher day after day. There has been some damage done, which increases the chances that the first lift from a low will probably not garner significant followthrough and some sort of a "W" bottom will have to form. Immediate intraday resistance for the S&P 500 is 1,014-1,022.70.

The Nasdaq finished Wednesday at the lower edge of a focus of support which is 1,855-1,843. This focus of support is inside the broader substantial support of 1,868-1,819.

The Nasdaq has a critical short-term support layer at 1,835-1,819. The first test of this area should attract some bears covering shorts and it could be the beginning of short-term oversold rebound, but rebounds based on short-covering can be notoriously short-lived, possibly only lasting 4 to 10 trading hours. If Nasdaq prices print below 1,819 for more than 4 minutes without attracting buyers, downside risk opens for a test of the next layer of support, which is 1,807-1,770.

More choppy trading is likely, but All of the sideways trading range price action experienced in June, July, and August represents huge support for prices.

Cherney is chief market analyst for Standard & Poor's

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