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Back in the Black on Wednesday?

Price momentum measures point to a bounce-back after Tuesday's sell-off -- but it might be short-lived

By Paul Cherney

This is option expiration week (regular monthly options). It is an uncertainty for Wednesday as to whether prices will reach down to fill the Nasdaq price gap and/or that the S&P 500 will actually have to print 1,124.99 or lower.

Sixty-minute measures (both indexes) have registered oversold levels which tilt the odds to favor a rebound in prices on Wednesday. But during the course of Tuesday's session, price momentum measures (60-minute measures, both indexes) reached levels which usually mean that the price rebound might only be a 4- to 10-trading hour event and there is usually a retest of the lows we have seen today. Other technical measures might emerge in the mean-time, but for now, that is the short-term technical view.

One aspect of Monday's market which was not particularly bullish (but I opted not to mention it) was the lack of volume on a day of higher prices, I attributed the thin volume to post holiday trading and the fact that the major European markets were closed. If this pattern, though, of lighter volume on the up-days returns, then the markets will become more vulnerable to downside pressure because it means that higher prices are attracting fewer buyers, not more buyers. As of this writing I do not have enough evidence to suggest that expectations for a multi-day advance have been extinguished.

The CBOE volatility index, or VXO, has moved above its 10-day exponential moving average. The VXO is going to have to move lower for equity prices to lift. This is very possible during an options expiration week because there are huge leveraged bets made in each direction and not much time left to expiration. Tuesdays and Wednesdays can easily trade in different directions.

But for now, the VXO will probably have to move below 17.09-16.82 to signal that short-term bulls have reclaimed command of the markets. Near the end of the trading session on Tuesday, the VXO's 10 day exponential moving average was 16.21. Usually, if the VXO moves above its 10-day and is putting distance between itself and the 10-day exponential moving average, equity prices are falling, but Wednesday can easily see the VXO move lower.

The S&P 500 has broken below its previous support at 1,149-1,135, which now is the first layer of resistance. The index's next support is 1,125-1,113, then 1,101-1087.06. The index has closed below 1,135.00 and this has opened downside risk for a print 1% to 2% lower, meaning it is possible to see prints of 1,124-1,112.

Immediate Nasdaq support of 2,064-2,049 was broken and that has converted to the first layer of resistance. The index is inside chart support at 2,036-2,011; there is a focus at 2,036-2,024. The index created a gap in the price chart on Friday, Apr. 2, and the gap remains open at 2,026.20-2,019.09. Downside risk looks limited for Wednesday. The Nasdaq has well defined daily bar chart support at 2,019-1,960.

The S&P 500 has immediate resistance at 1,135-1,149. Resistance is stacked with a well-defined (strong) band of resistance at 1,149-1,176.97, with a layer of resistance inside this zone at 1,149-1,158.98. I have reviewed charts from March, 2002, and there is a well-defined layer of resistance for the S&P 500 at 1,166.27-1,173.94.

The Nasdaq has immediate intraday resistance at 2,048-2,064, then 2,072-2,102. This resistance has a focus of resistance at 2,072-2,091. Next resistance above 2,102 is 2,108-2,153.83. Any time resistance is exceeded it must be treated as support until proven otherwise. Anytime supports are undercut they must be considered resistance until proven otherwise.

Cherney is chief market analyst for Standard & Poor's

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