Ready for a Breather?

After Monday's sharp rise, the Nasdaq and S&P 500 appear ripe for some short-term profit-taking

By Paul Cherney

Both the Nasdaq and the S&P 500 have satisfied bullish breakout price targets -- prints of 1,136 for the S&P 500 and 2,011 for the Nasdaq. This does not mean that the upside is over, but short-term, there could be a little profit-taking which caps upside for a day or two.

The Nasdaq and the S&P 500 are currently registering overbought readings (price-only measures) on the 60-minute charts and appear ripe for some short-term profit-taking which might see prices edge only marginally higher, or move sideways with a negative drift for a day or two.

Longer-term measures comparing up volume with down volume remain at levels which suggest that price weakness would probably only be short-term in duration and shallow in depth.

Nasdaq resistance is now a band 2,037-2,079, inside this band there is thick resistance at 2,048-2,064.

The S&P 500 has a layer of resistance at 1,135-1,149. The index has stacked resistance. The next layer of S&P 500 resistance is 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 CBOE volatility index, or VXO, has been cooperating. The best case for bulls would be a VXO that is below its 10-day exponential moving average and, that continues to put distance between itself and its 10-day. Late in the session Monday, June 7, the VXO's 10-day exponential moving average was 16.55, but shorter-term measures and chart observations suggest that if the VXO moves above 15.51, it would probably mean that the sellers are taking short-term control (intraday).

Immediate support for the Nasdaq is 2,009-1,989, then 1,981-1,967; additional support is 1,971-1,957.58. A close below 1,957 would open downside risk for prints 1,934 and lower (not expected). Support under 1,957 is 1,934-1,913.73, then 1,918.08-1,899.85, with a shelf of support 1,918-1,914.

Immediate intraday support for the S&P 500 is 1,130-1,123, then 1,116.71-1,109.91, with a focus inside this zone at 1,116-1,112.71. This is strong support. Additional supports are 1,109.04-1,106.10, then 1,100.72-1,090.74.

Here are some statistics about Junes during presidential election years which I interpret to mean that there is probably more on the upside this month. All percent changes based on S&P 500 prices; date ranges for the historical study were the June months during the years 1928 to 2003.

Since 1928, there have been 19 presidential election years and for the month of June, the S&P 500 has been higher 15 out of 19 times, or 79% of the time.

The average of all 19 years (the 15 winning Junes and the 4 losing Junes) was a gain of 1.87%; for the current market, that would equate to an S&P 500 close on June 30, 2004, of 1,141.64.

Based on S&P 500 price data since 1928 for the 19 presidential election year Junes, the average of all the best closes (see below) for each of the 19 Junes was a gain of 4.22%, which for the current market, would equate to a close of 1,167.97.

The average of the worst closes inside the June months of presidential election years was a loss of 1.37%. The equivalent for the current market would mean a close of 1,105.33, right at the bullish breakout level of Tuesday, May 25, 2004.

These are just averages, every market is different but these averages of the best and the worst do offer a window of expectations: If average performances were replicated, the closing price ranges inside the month might be 1,105-1,167.97.

Historically, the odds have been about 8 in 10 (15 out of 19 times) that the presidential election year Junes have closed with gains for the month.

Best Closes: "Best closes" are calculated by taking the highest daily close in the month and expressing that close as a percentage change from the close at the end of previous month. This was done for each of the 19 presidential election year Junes and then all of those best closes were averaged. The same was done with the worst closes.

Cherney is chief market analyst for Standard & Poor's

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