Bulls, Bears in a Stalemate

End of day indicators for both the Nasdaq and the S&P 500 are neutral with only a slightly positive bias

By Paul Cherney

A big jump in advance third-quarter GDP on Thursday occurred, but the markets were unable to attract additional buyers after the open and the day turned into a day of distribution.

Anecdotally, it is surprising that the surge in GDP could not generate more of a price advance. Also, this earnings season has produced good numbers which have failed to inspire a huge stampede to the long-side. Maybe these markets feel that the good news has already been reflected in the price advance we have seen.

Bulls and bears are in a stalemate right now on two time horizons, intraday and end-of-day.

End of day indicators for both the Nasdaq and the S&P 500 are neutral with only a slightly positive bias.

The end of the mutual funds' fiscal year is October 31 (Friday) and there could be some end of the year window dressing to support prices.

The VXO (market volatility index) might offer the only clues as to what the markets are going to do. I would become concerned about additional profit-taking if the VXO started to move above 18.09, I would assume that some sort of a correction was at hand. That's a chart observation. The 10-day exponential moving average of the VXO is close to 18.35 and if the VXO moved above that equity prices would probably be dropping.

Thursday, and Wednesday of this week, the VXO registered new five-year lows. Thursday's low print was 17.01. The last time the VXO was this low was July 20, 1998, when the VXO hit a low of 16.73. In 1998, July 17 (the trade day before the VXO print of 16.73) was the high close before the market went into a sharp decline culminating with the bail-out of Long-Term Capital Management in October, 1998. I want to reiterate something I have repeated several times, there is nothing bearish about a low VXO; the potential problem arises when the VXO is rising.

I went back and looked at the S&P 500's chart from 1998, there are two striking similarities: 1) the VXO (formerly the VIX), and 2) the chart pattern leading into the July 1998 top. In 1998, the S&P 500 spent several months meandering sideways before a final lift into the July 17, 1998, high close. The gain from the most recent consolidation low to the July 17, 1998, high close represented a 10.2% advance. If today's S&P 500 repeated that kind of a move it would equate to a close of 1,066.

I looked at the VXO and the S&P 500 at that 1998 top and the one thing which accompanied the subsequent decline (after the July 17, 1998, top) was a trend higher in the VXO. Obviously, today is not 1998, but if the VXO starts rising, especially if it gets above its 10-day exponential, equity prices should be weakening. The VXO closed Thursday's market at 17.50.

Nasdaq resistance is 1,930-1,966.87, with layers at 1,934-1,944 and 1,941-1,953. The next layers of resistance are 1,979-2,011.25 and 2,042-2,073.

The S&P 500 has only one layer of immediate resistance: 1,047-1,053.79, with a focus at 1,047-1,050.11. Even with a 7.2% GDP number, the S&P 500 could only manage an intraday high print of 1,052.82. After resistance at 1,053.79, the next resistance is 1,068-1,106 with thick, brick-wall style resistance 1,068-1,090.

Immediate Nasdaq support is 1,923-1,907, but I have an intraday pricing model which is suggesting that an intraday print on Friday which undercuts 1,927 will increase the odds for a test of 1,908-1,901.

The S&P 500 has supports at 1,036-1,026 and 1,028-1,023.93.

Expectations for S&P 500 1,068 or higher, and a Nasdaq close of 1,988, both before Dec. 8, have not become extinct, but a rising VXO would not lend itself technically to expectations for a move higher.

Cherney is chief market analyst for Standard & Poor's

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