"Selling the News" on Earnings

These markets are getting ripe for a short-term round of profit-taking

By Paul Cherney

Longer-term momentum measures for both the Nasdaq and the S&P 500 remain technically positive but it should be pretty obvious to market observers that many of the earning reports are only attracting sellers, traders and investors who are using the good or as expected earnings reports as a cue to take some long-sided profits off the table.

Stocks which reported and saw weakness on Tuesday, Jan. 20, included Citigroup (C ), Bank One (ONE ), 3M (MMM ), and United Technologies (UTX ).

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. These markets are ripening for a short-term round of profit-taking.

A short bout of profit-taking might have to occur before another small leg higher can unfold but right now, I do not have overwhelming evidence that a short-term decline is imminent. Usually, with the configurations of indicators I have now, a short-term decline finds buyers and prices will rebound.

Very near the close of trading on Tuesday, the 10 day exponential moving average of the the CBOE volatility index, or VXO, which measures implied volatility in OEX options contracts, was 15.86. I tried to explain in Friday's end-of-day comment that a low VXO means low volatility and low volatility means quiet, small price moves. So even though, on balance, longer-term indicators are registering positive readings, the low volatility suggests that prices might only move at a snail's pace until buyers evaporate and profit-takers lose patience waiting for another upleg to unfold.

Volatility increases with adverse price movement (movement out of, away from, the trend in prices.) If the VXO moves above 15.88, assume that some sort of profit-taking is creating the relative increase in volatility prices should be dropping.

The Nasdaq has a layer of immediate intraday support at 2,139-2,129.

Additional support for the Nasdaq is 2,121-2,105, then 2,101-2,084, 2,089-2,078, then 2,062-2,047. There is a focus of support at 2,089-2,084.

The Nasdaq is currently in a layer of resistance at 2,121-2,181, which was established in June, 2001.

The S&P 500 has a layer of immediate support at 1,138-1,133.

Additional supports for the S&P 500 are a stacked staircase beginning at 1,124-1,119.90, 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 intraday resistance for the S&P 500 is 1,139-1,142.93. The next layer of resistance is 1,151-1,176.

The next two observations seem to make a good case for a mostly sideways market for more than just a few trade days:

• 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, so downside should still be limited, but as the earnings reports for the fourth quarter are delivered and digested, the upside for the markets is now appearing to be limited.

Cherney is chief market analyst for Standard & Poor's

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