A Bullish Breakout
By Paul Cherney
Tuesday's price action must be viewed as a bullish breakout of the trading range.
Some portion of the buying on Tuesday was bears being forced to cover short positions (I am guessing due to the huge drop in the CBOE volatility index, or VXO). Their buying influence usually represents only a short-term impact on the markets, from 1 to 4 trading days. After they're finished, a short-covering lift like Tuesday's can only blossom into additional upside if longer-term investors are convinced that there is something more to the upside. They have to step to the plate and become buyers as short-term traders who jumped on the intraday momentum train take profits in their long-sided trades. When the longer-term traders are firm believers in the upside, prices will not retrace into the price bar on the day of the initial buying thrust.
That probably won't be the case for the current market. It would be natural to see some retracement into the price range established on Tuesday (at some time over the next three trading days). It is important for the short-term bullish case that the lows from Tuesday not be undercut. The lows were 1,913.73 for the Nasdaq and 1,090.74 for the S&P 500. If the lows are undercut, the odds sky-rocket that Tuesday's lift was a false breakout. I think there is more to come on the upside but that does not mean every single day is a gainer.
A retracement into Tuesday's price range has to stay above the lows, but more preferably it should find buying support above a 50% retracement of the daily range. That would mean prices (if there is a retracement into the range, and I think there should be) should preferably attract buyers before prints of, roughly, 1938 for the Nasdaq and 1,101 for the Nasdaq.
Nasdaq: Immediate intraday support is 1,951-1,945, then 1,934-1,913.73, then 1,918.08-1,899.85, with a shelf of support at 1,918-1,914.
S&P 500: Immediate intraday support is a small shelf at 1,109.04-1,106.10, then 1,100.72-1,090.74.
During retracements, truly bullish markets often only approach support zones without printing inside them because buyers are so aggressive that they are satisfied with buying at any price cheaper the previous print.
The Nasdaq has resistance at 1,966.66-1,975.57. Next resistance is 1,989-2,009.11.
The S&P 500 has resistance at 1,107-1,117 and the next layer of resistance is 1,116-1,129.25, with especially thick resistance at 1,126.28-1,129.25. This also creates overlapping resistance at 1,116-1,117. Next S&P 500 resistance above 1,135 is 1,135-1,149.
Cherney is chief market analyst for Standard & Poor's