Market Drops on Greenspan's Words

The markets will probably be willing to give the Fed chairman the opportunity to clarify his remarks Wednesday

By Paul Cherney

Federal Reserve Chairman Alan Greenspan's prepared remarks were not taken well. In his remarks about the banking system, he included the phrase: "many banks indicate that they now either are interest-rate neutral or are positioned to benefit from rising rates." I think the phrase was supposed to illustrate that the banking system is fine, in strong shape, but the markets interpreted the phrase to mean tighter monetary policy is closer rather than further away.

In the Q&A, he included a comment that deflation is no longer a concern, and that eliminated another column of support which the markets had relied on as a reason to keep rates low.

A small selling capitulation Wednesday morning which briefly pushes prices lower would probably be used by short-sided traders to cover outstanding short positions. The markets will probably be willing to give Greenspan the opportunity to clarify his remarks at his 10 a.m. appearance in front of the Congressional Joint Economic Committee where the topic of his testimony is the economy and monetary policy.

Sixty-minute measures are at levels which often see markets that are staggered grope for buyers, sometimes moving even lower, and even though an opening drop should attract short-term buying interest, price momentum measures (60 minute bars) have not displayed the configurations I associate with a short-term bottom, although that might occur intraday on Wednesday. The overnight systems run might offer signals of more intermediate term worth.

The study presented last week about the S&P 500's performance in the wake of a lopsided number of decliners vs. advancers produced an average decline which would equate to closing values for the S&P 500 in the 1115-1112 area, and those prices are also at the lower edge of a focus of support.

The VXO (CBOE volatility index, or VXO, measures implied volatility in OEX options contracts) is now above its 10-day exponential moving average and I view that as a background negative for stock prices. But this is a measure that can be monitored during the day, and if the VXO manages to push back below it's 10-day exponential; some sort of an oversold bounce is probably taking place. Near the end of the trading session on Tuesday, the VXO's 10-day exponential moving average was 16.09.

The S&P 500 has support 1125-1102. There is thick support 1125-1113.

Immediate NASDAQ support is: 2019-1960. There is a layer of especially well-defined support which starts at 1985 and runs to 1960 area. Next support 1920-1896.

The S&P 500 has immediate resistance 1127-1139 and 1135-1149, which makes the 1135-1139 area a focus of resistance. Resistance is stacked with another layer of resistance 1149-1176.97 with especially thick resistance 1149-1158.98. The March 2002 charts show a well-defined layer of resistance for the S&P 500 at 1166.27-1173.94.

The NASDAQ has immediate resistance 1991-2023 with a focus 1999-2009. Next resistance 2027-2040.15, then 2048-2064, then 2072-2102. 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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