No Signals for a Rebound

Erratic trading is likely as the markets try to find consistent buying support

By Paul Cherney

More jagged, indecisive trading is possible.

I don't think that prices can move dramatically lower from current levels (for this leg down), but I don't really have strong evidence to suggest that prices are ready to rebound. Usually, excessively negative readings like those generated in the session Wednesday, Mar. 10, are followed by a few trade days of erratic trading as the markets try to find consistent buying support. This is based on both intraday and end-of-day price bars.

Occasionally the negative combination of indicators established during the session on Wednesday can see prices just turn on a dime and start moving higher, but more often than not they are followed by either an erratic search for buyers or a relatively small price range of sideways price movement with a negative bias.

These markets are going to have prove themselves by demonstrating the ability to rise and exceed resistance levels. Until then, patience is a virtue.

The broad picture of Nasdaq support is a band 2,001-1,783, established over the months of October, November, and December, 2003. The index has well-defined support at 1,994-1,925, then 1,907-1,878.

The S&P 500 has support at 1,110-1,091, with a focus at 1,097-1,091, then 1,082-1,053, with well organized support at 1,077-1,031.

Immediate resistance for the S&P 500 runs 1,120.90-1,129, and this is the area of resistance which would have to be exceeded on a closing basis to suggest that buyers are back in command.

The immediate resistance that the Nasdaq would have to close above is 1,962-1,982.58.

The S&P 500 has closed below the at 1,120.90 and this has technically opened downside risk for a test of the next layer of organized support on the daily charts, which is 1,077-1,031. There is no calendar or timetable for this potential downside target. Prices never move in straight lines.

Line of Death: A "line of death" is the lowest price point in a sideways consolidation. A pre-requisite for a "line of death" is a sharp (asymptotic) rise in prices and then just a sideways consolidation pattern. The truly important "lines of death" occur after a multiple week (or month) uninterrupted trend higher which finally reaches price levels where buyers and sellers meet in equilibrium (that's why prices just move sideways in consolidation).

The line of death is the lowest price point established during that sideways consolidation. It represents a "towel toss" level for the people who went long during the consolidation and it also represents a "take profits" point for the people who shorted near the top of the sideways consolidation. The first test of a line of death often produces a hard, fast rebound.

Why? My theory is that the first test of the line of death usually produces a rebound in prices because it represents the bears who were playing the trading range and when prices reach the bottom of the range, they are happy to take all or some of their short-side profits by buying to cover. Oftentimes, (in a generally bullish market), their buying turns the market up for another trip to the upper edge of the band of consolidation, but, if the lift generated by the short-covering at the bottom the consolidation (at the line of death) fails to generate follow-through buying and prices rollover and pierce the line of death again, then bulls who had gotten long during the consolidation give-up on the long-side and sell, adding to the downward pressure.

Cherney is chief market analyst for Standard & Poor's

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