Bulls, Bears in Balance

The markets are probably going to have to establish some sort of base to restore short-term confidence

By Paul Cherney

Much of the price action on Tuesday, June 15, was probably related to options. A short squeeze. If there had been more volume it would suggest to me that longer-term investors might have been entering the markets as opposed to just mechanical short-covering and hedge unwinding.

I think the markets are probably going to have to establish some sort of footing (a base) to restore short-term confidence. I think I would be wrong in this assessment if the S&P 500 managed to close above 1,142.18 and/or the Nasdaq managed to close above 2,023.

Right now, there really is still a balance between buyers and sellers, it is just that on Monday, for just the day, the pendulum swung in favor of the sellers, but in Tuesday's session, the pendulum swung in the other direction. Net-net, there was not much of a change in prices from last Thursday's close to Tuesday's closes.

The overnight systems run from Thursday, June 10, produced two minor signals with negative implications. NYSE and Nasdaq volume measures and NYSE breadth measures suggest sideways trading, with a negative bias, and short-term downside risk of a 1.6% to a 2.3% closing loss for the S&P 500 sometime over the next few trading days.

Triple Witch weeks like this one can enjoy a life of their own regardless of short-term signals, but I am using short-term downside risks of -1.6% to -2.3% because the last 2 times I had this combination of minor signals (based on NYSE breadth and NYSE volume), were April 12, 2004, and January 27, 2004, and it was exactly the sixth trading day after for each of the previous signals that the S&P 500 had closing losses representing -1.6% and -2.3% (measured from the closing price on the day of the signal). Equivalent measures for the current market would be S&P 500 closes of 1,118.63 and 1,110.17 as of the close on Monday, June 21. History never repeats exactly and other technical conditions might unfold to force a re-assessment.

Reminder about the Nasdaq's "line of death." If the lift ignited by Tuesday's short-covering fails to generate followthrough buying and prices roll over and undercut Nasdaq 1,957, then the chances for a test of 1,934-1,913.73 increase. Additional Nasdaq supports are 1,918.08-1,899.85, with a shelf of support 1,918-1,914.

The chart for the S&P 500 is not as vulnerable as the Nasdaq's chart, but if the S&P 500 were to undercut 1,109.91. The next layer of support runs 1,102.77 to 1,078, with a focus at 1,097-1,085.

The CBOE volatility index, or VXO, has moved back below its 10-day exponential moving average and as long as that is the case, downside is probably limited. Near the close on Tuesday, the 10-day exponential moving average of the VXO was 15.49.

The shelves of price action established midday on Wednesday, June 9, 2004, represent the most important short-term resistance levels. Those midday shelves are Nasdaq 2,001-2,006.79 and S&P 500 1,134.34-1,136.53. In Tuesday's session, the S&P 500 managed to spend some time above 1,136.53, with an intraday high of 1,137.36. The Nasdaq was unable to print above 2,006.79; its intraday high was 2,006.58.

S&P 500 support is 1,129-1,009.91. Next support: 1,102.77 to 1,078, with a focus at 1,097-1,085.

Cherney is chief market analyst for Standard & Poor's