A Short-Term Seasonal Slump?
By Paul Cherney
Friday, Feb. 20, is February option expiration.
There are technical divergences that are not confirming the lift in prices (the lift the markets have experienced since Feb. 4, 2004).
I have just completed a study documenting price and volatility patterns before and after February expirations based on S&P 500 data for 1986 through 2003. There is a strong seasonal pattern apparent after the Friday of February expiration. For the past 19 years, on average, prices have tended to bottom on the fourth trading day after February expiration. For this year, that fourth trade day would equate to Thursday, Feb. 26.
Will history repeat itself? History never repeats exactly. But, if technical measures are in positive configurations or turn positive close to Thursday, Feb. 26, then there would be agreement between technicals and historicals and that would bolster confidence to expect something to the upside after some lower prices over the next few trade days.
If the seasonal patterns in place since 1986 repeat, we can expect some weakness next week but then prices have tended to trend higher.
It now appears more likely that the weakness for both the Nasdaq and the S&P 500 can easily unfold.
For Friday, February option expiration, based on S&P 500 price action since 1974, odds are 19 in 31 that the S&P 500 will finish the trading day with a gain. Nineteen out of 31 is 61% of the time. For Monday, the odds are 16 in 31 or 51.6% of the time, a virtual coin-toss.
Nasdaq immediate intraday chart resistance is 2,072-2,085.32. There is a bigger band of resistance at 2,077-2,102, with thick resistance at 2,077-2,091. Next resistance above 2,102 is 2,108-2,153.83.
Chart resistance for the S&P 500 is 1,151-1,176.97, with a layer of well-defined resistance at 1,151.44-1,158.89.
Historical studies suggest that prices at the end of the year will probably be higher than they are now, but here's the short-term view:
Immediate Nasdaq support is Nasdaq 2,050-2,042.75, then 2,029-2,012. Almost regardless of what happens on Friday, the Nasdaq looks destined to test the lower support soon.
Immediate support for the S&P 500 is 1,148-1,136.66, with a focus at 1,147-1,141. If the index traveled to under 1,136.66 for more than four minutes intraday, risk would open for a test of 1,129-1,124.
Very near the close of trading on Wednesday, Feb. 18, the 10 day exponential moving average of the the CBOE volatility index, or VXO, was 16.00. The VXO closed Thursday, Feb. 19, at 16.90, usually not a healthy condition for equity prices, but option related hedges might prevent prices from moving much in either direction on Friday.
Cherney is chief market analyst for Standard & Poor's