Support Levels Are Key

If critical price levels are undercut, chances increase for some volatility -- and lower prices to follow

By Paul Cherney

Price momentum measures based on S&P 500 data have registered levels which might see more sideways action, with limited downside, but chart support is the key to this market.

Nasdaq indicators based on end of day measures are neutral with a slightly negative bias.

Under these conditions, if chart supports do not hold, and the following levels are undercut, then chances increase for some volatility and lower prices to follow.

Well-defined support (strong) for the Nasdaq (intraday) is 2,045-2,032, and if tested is expected to hold.

S&P 500 intraday support is 1,150-1,141.80.

The momentum measures were not particularly strong for either index, and now the S&P 500's momentum measures have weakened to neutral.

Immediate Nasdaq support is 2,045-2,032, then 2,024-2,012, overlapping 2,014-2,005, and the bigger band established over the months of October, November and December, 2003, of 2,007-1,959. There is a focus of support at 2,001-1,996. Next support is 1,980-1,959.

Immediate support for the S&P 500 is 1,150-1,141.80, overlapped at 1,147-1,138.62, which makes the 1,147-1,141.80 area a focus of support. Next support is 1,129-1,124.

Nasdaq immediate chart resistance is 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.

The next layer of chart resistance for the S&P 500 is 1,149-1,176.97, with a layer of resistance inside this zone at 1,149-1,158.98.

The CBOE volatility index, or VXO, is below its 10-day exponential moving average, which I interpret as a background positive for prices, but the VXO appears to be moving higher, which is usually not a healthy condition for equity prices. Very near the end of trading on Tuesday, Mar. 2, the 10-day exponential moving average of the VXO was 15.42. Judging from the chart, any move above 15.24 is probably going to coincide with stock price weakness.

All the historical studies in the world don't matter if prices do not move in agreement with them. Even though we are in a period of time when recently, there has been a history of positive price action, if price is not moving in the same direction as the tendencies quantified in the studies suggest, then the studies do not matter, only prices matter.

The support levels mentioned above appear important because neither the Nasdaq nor the S&P 500 was able to establish a higher high and that means that if there is a close below those support levels, then a series of lower highs and lower lows will have been established, and that is the definition of a downtrend.

Cherney is chief market analyst for Standard & Poor's

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