Downside Appears Limited

Technical signals suggest that the market is establishing a base, meaning minor gains or losses could occur

By Paul Cherney

On Apr. 21, Federal Reserve Chairman Alan Greenspan appeared in front of the Congressional Joint Economic Committee describing the strength in the U.S. economy. When faced with the reality of the first rate hike (after a period of loose money), bull markets usually embrace the idea that the Fed would not be raising rates unless the economy were strengthening and a strong economy will push corporate earnings and stock prices higher.

Downside looks limited.

The overnight systems run for Tuesday, Apr. 20, produced a unique combination of signals for the S&P 500 which suggest that the next few trading days could see limited downside and the establishment of a base. Other technical measures might unfold, but for now that is the technical read for the S&P 500. Establishing a base means minor gains or minor losses could occur.

There simply is not agreement among the S&P 500 indicators I use to raise expectations that additional significant downside is at hand. Also, the technical study I did last week that looked at the price action in the S&P 500 after the ratio of decliners to advancers at the NYSE was over 6.0 comes into play. The average decline (on a closing basis) after similar technical profiles of the past, was a closing loss of about 1.3% to 1.5%, that equates to 1,115-1,112 for the S&P 500. That makes yesterday's close of 1,118 pretty close to the average of the worst performances in the first 22 trading days after similar events in the past (since 1966).

That doesn't mean that there can't be closes lower than 1,115-1,112; those numbers represent the average and the median of closing losses, but downside appears limited and historically after similar events, there is, on average, more to upside than the S&P 500 has seen yet. (The study was based on signal dates when the NYSE decliners divided by advancers was over 6.0 and the S&P 500 closed the session in the upper half of both its 50 and 100 day trading ranges.)

A market which moves mostly sideways for a couple of days is very possible as believers that the strengthening economy will propel stock prices higher will be buyers while believers that the higher rates will stop any advance will be sellers.

Here's a reminder from Monday's end of day comment: On Fed rate hikes: Sam Burns, a research analyst at Ned Davis Research notes: "One rate hike alone isn't enough to derail a bull market, usually it takes two or three or four."

Ned Davis Research studied price performance of the Dow Industrials back to 1917. The DJIA tends to be up 8% one year after the first rate hike.

The CBOE volatility index, or VXO, is now Below its 10-day exponential moving average and I view that as a background positive for stock prices. Near the end of the trading session on Wednesday, the VXO's 10 day exponential moving average was 16.03.

The S&P 500 has support at 1,125-1,102. There is thick support at 1,125-1,113. Wednesday's intraday low was 1,116.03.

Immediate Nasdaq support is: 2,019-1,960. There is a layer of especially well-defined support which starts at 1,985 and runs to the 1,960 area. The Nasdaq's intraday low on Wednesday was 1,973.25. Next support is 1,920-1,896.

The S&P 500 has immediate resistance at 1,127-1,139, and 1,135-1,149, which makes the 1,135-1,139 area a focus of resistance. Resistance is stacked with another layer of resistance at 1,149-1,176.97, with especially thick resistance at 1,149-1,158.98. The March, 2002, charts show a well-defined layer of resistance for the S&P 500 at 1,166.27-1,173.94.

The Nasdaq has immediate resistance at 1,991-2,023, with a focus at 1,999-2,009. Next resistance is 2,027-2,040.15, then 2,048-2,064, then 2,072-2,102. Anytime 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