Some Profit-Taking Possible

Longer-term momentum measures for both the Nasdaq and the S&P 500, while technically positive, are fading

By Paul Cherney

Friday, Jan. 16, is the regular monthly expiration of options. The machinations of the expiration might prevent prices from moving too far in either direction on Friday (like Thursday). Sometimes, the option hedges in place lend themselves to a lack of volatility, but January hedges will not be needed after expiration.

Longer-term momentum measures for both the Nasdaq and the S&P 500 remain technically positive, but they are losing momentum, especially the Nasdaq -- and this can be a set-up for a short-term (couple of trading days) drop. An air of caution is starting to grow and profit-taking at the beginning of next week is beginning to look possible.

Daily measures are in positions which can see pops in price which fail to garner significant follow-through higher and sometimes, sloppy, sideways and slightly lower prices can unfold.

The CBOE volatility index, or VXO, is virtually at its 10-day exponential moving average. The chances for a good move higher do increase when the VXO can move under its 10-day exponential moving average, but other indicators of momentum are starting to suggest that a short bout of profit-taking might have to occur before another small leg higher can unfold. The indexes have been banging against a price ceiling for 5 trading days now; sometimes a day or two of declines can satisfy short-term selling pressure and then the markets can make a move back up again.

Very near the close of trading on Thursday, the 10-day exponential moving average of the VXO was 16.22.

Immediate intraday resistance for the S&P 500 is now 1,133-1,137.11 (1,137.11 was Thursday's high print). Next layer of resistance is 1,151-1,176.

Immediate intraday supports for the S&P 500 are a stacked staircase beginning at 1,124-1,119.90. Additional supports are 1,118.48-1,113.69, then 1,106-1,100; the broad support is 1,106-1,068 and 1,083-1,053, which makes a focus of support 1,083-1,068. Price support thickens with prints of 1,096 and lower.

Immediate support for the Nasdaq is 2,101-2,084, 2,089-2,078 then 2,062-2,047. The focus of support is 2,089-2,084.

The next two observations seem to make a good case for a sideways market:

• Good earnings reports could be viewed as a "sell on the news" event for some companies, capping upside.

• There is virtually no competition for an investment dollar. Downside should still be limited, but as the earnings reports for the fourth quarter are delivered, the upside for the markets might be limited as the markets digest some of the gains of the past 15 months.

Cherney is chief market analyst for Standard & Poor's

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