Nasdaq on the Ropes

Assets are shifting out of many large-cap tech names and into relatively more defensive consumer stocks

By Paul Cherney

Short-term intraday oversold levels were registered on Monday, Feb. 23, and some sort of an attempt to bounce on Tuesday, Feb. 24 would be natural. Nasdaq prices would have to close above 2,051 to start to erode expectations for slightly lower prices sometime over the next few (3) trading days.

The S&P 500 does not have the problems that the Nasdaq is experiencing. Right now there is a shift in assets occurring out of many of the familiar large cap tech oriented stocks and into the relatively more defensive consumer stocks. The Nasdaq was down roughly 1.5% on Feb. 23 while the S&P 500 was down less than half of a percentage point. For the S&P 500, losses in its large cap tech components hurt, but money is shifting into the defensive consumer oriented stocks in the index, so, the overall index value only edged lower on Feb. 23.

Historical studies suggest that prices at the end of the year will probably be higher than they are now, but for the next couple of trade days, prices might move lower. Based on S&P 500 data from 1986 to 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 trading 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 trading days.

Immediate Nasdaq support is 2,007-1,970; there is a focus of support at 2,001-1,996. Next support overlaps at 1,980-1,959. Prints in the 1,982-1,970 range look like a likely spot for bulls to dig in their heels.

I think it would be better to see a Nasdaq price decline with a spike in volume to signify that fence-sitters are throwing in the towel. By "fence-sitters" I mean people who want to sell but are only waiting for a nice rebound to exit positions at prices much better than the recent lows. If they lose patience waiting for a rebound and then just start selling, that would represent a mini-capitulation. A capitulation like that usually requires a negative headline which forces the fence-sitters into the sell-side of the pasture, but that process, their selling, eliminates potential sellers hovering above current prices and stocks can enjoy a rebound which lasts more than a day.

Immediate support for the S&P 500 is 1,148-1,136.66. 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.

Nasdaq immediate intraday chart resistance is 2,026-2,051, overlapping at 2,049-2,062.48, then 2,072-2,094.92. This resistance actually goes all the way to 2,102; there is a focus of resistance at 2,072-2,091. Next resistance above 2,102 is 2,108-2,153.83.

Chart resistance for the S&P 500 is a small shelf 1,144-1,149. Resistance is stacked at 1,149-1,176.97, with a layer of resistance at 1,155-1,158.89.

Cherney is chief market analyst for Standard & Poor's

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