Downside Remains Limited

With longer-term momentum measures still positive, a dramatic decline in prices is unlikely

By Paul Cherney

Longer-term momentum measures for both the Nasdaq and the S&P 500 remain technically positive, but as the earnings reports are delivered, these reports are not really creating stampedes of buyers. As long as longer-term measures of momentum remain positive, it is unlikely that there will be a dramatic decline in prices.

It is rather rare that price advances just turn on a dime; there tends to be a small breakdown, then an attempt at a recovery which does not attract sufficient buying interest to break above recent highs. That's when the chances for some downside increase. These markets have not even seen a small breakdown yet.

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.

Usually, with the configurations of indicators I have now, a short-term decline, even one of up to five trading days, finds buyers and prices will rebound. It is the internal measures of breadth and volume during that rebound which will help tilt the scales for expectations of an additional leg higher, or a period of slightly lower prices as markets consolidate the huge run-up since March, 2003.

Very near the close of trading on Wednesday, the 10-day exponential moving average of the CBOE volatility index, or VXO, which measures implied volatility in OEX options contracts, was 15.60. Fears for a protracted decline in prices would not increase until the VXO can demonstrate the ability to move back above its 10-day exponential moving average.

The Nasdaq has a layer of support at 2,139-2,129, then 2,121-2,105, then 2,101-2,084, 2,089-2,078, then 2,062-2,047. The index is getting tired of moving higher but it has not rolled over yet and as explained above, the first dip in prices is usually treated as a buying opportunity.

The Nasdaq is currently in a layer of resistance at 2121-2181; in the past few trading days, the index has developed a well-defined layer of immediate intraday resistance at 2,144-2,150.

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 resistance for the S&P 500 is 1,151-1,176.

Cherney is chief market analyst for Standard & Poor's

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