Watching the VXO

It looks as if the volatility index is ready to make a short-term trend lower, which should be a positive for equity prices

By Paul Cherney

Jagged, indecisive trading is still very possible. These markets are a tough call.

It looks as if the CBOE volatility index, or VXO, is ready to make a short-term trend lower, which should be a positive for equity prices -- maybe for as many as three trading days. But it still remains a great mystery whether prices can move appreciably higher.

In Monday's overnight systems run I had intermediate term signals which keep the odds for the S&P 500 tilted to favor that significant follow-through higher is not the most likely course for prices and that the market should exhaust short-term buying demand and that it is either going to have to establish a lateral base, or, continue to have lower closes.

On Tuesday, the Nasdaq printed an intraday low of 1,927.69 and that was just inside the upper edge of a layer of support that looked like a likely sponsor of a bounce. The Nasdaq had a bounce, intraday on Tuesday, but during the session there was no appreciable improvement in enough of the indicators I look at to bolster confidence in calling for anything more than a token extension of the rebound.

I don't think anything about the current markets is easy to call but when I look at the chart of the VXO I see a short-term double top in place and I think there should be a lower VXO, which usually means higher equity prices, but it looks like a real struggle. Even on Tuesday, as prices enjoyed a nice short-covering rally near the open, the higher prices did not attract more buyers, those higher prices attracted sellers.

This is the week of the Triple Witch (quarterly expiration of futures and options). There are huge leveraged bets in place and a washout in the morning on Wednesday should force short-sided profit-taking (cause bears to buy to cover and probably close-out profitable long put positions). This was the case for Tuesday's market and it is the case for Wednesday's, too.

The Nasdaq has broad support at 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, and in viewing the 60-minute charts I noticed a layer of support at 1,928-1,906, which has made the 1,928-1,925 area a focus of support.

The S&P 500 has support 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 is 1,107-1,112.25, then 1,120.90-1,133.11. (Notice, I changed the upper number to 1,133.11.)

The immediate resistance for the Nasdaq is 1,945-1,955.39, then 1,962-1,982.58, then 1,996-2,022.

On Thursday, March 11, 2004, the S&P 500 closed below the "line of death" 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 time-table for this potential downside target. Prices never move in straight lines and a move to test or close down in the support 1,077-1,031 might not unfold, but until I see stronger technical evidence to sway my opinion, that is what I expect.

Cherney is chief market analyst for Standard & Poor's

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