Downside Should Be Limited
By Paul Cherney
Momentum measures are still maintaining a positive bias but the failure of the indexes to hold onto the gains seen Thursday morning (June 24) makes it a little more likely that there might have to be some sideways price action.
Intraday on Thursday, 60-minute measures established configurations that are usually followed by some additional weakness, but then a rebound in prices. The possibility of some weakness early tomorrow morning exists. But at this point, my guess is that short-term downside is probably limited due to the recently established trading range.
On Wednesday, the S&P 500 closed above the 1,142.18 level. This represents a bullish breakout of the recent trading range and should be treated as such unless proven otherwise. It is perfectly natural for a breakout to retrace and test the upper edge of the trading range of the breakout. The standard calculation for a potential price target is to take the trading range (1,142-1,122) and add it to the breakout point which would create a potential target of S&P 500 1,162.
The Nasdaq needs to have a close above 2,023.54 to produce a bullish breakout. If and when it does, the recent trading range has been 2,023.54-1,963, or 60 points. A potential upside target would be 2,083.
The previous paragraph describes the requirements for a Nasdaq breakout, but since Thursday saw prices rise and attract sellers (who pushed prices back down), then the price levels that have to be exceeded to assure that the sellers lurking just above current prices have been satisfied are Thursday's highs -- namely, Nasdaq 2,032.21 and S&P 500 1,146.34. Any rise that cannot see the Nasdaq close above 2,032.21 and/or the S&P 500 close above 1,146.34 would increase the chances for some slow motion sideways trade in the upper half of the recent trade ranges.
The 10-day exponential moving average for the CBOE volatility index, or VXO, was 14.62 near the close on Thursday. Stock prices often move lower when the VXO moves above its 10-day exponential moving average and puts distance between itself and the 10-day, so if the VXO were to move above the 14.62 level, this would be a signal that selling pressure is gaining the upper hand. For Friday's market, I do not think it is possible to have a good lift in prices unless the VXO can move below 13.90.
The Nasdaq's immediate closing resistance is still 2,015-2,023.54. The next layer of resistance is 2,037-2,079; inside this resistance is a thick band at 2,048-2,064.
The Nasdaq has support at 2,015-2,000, then 1,996-1,982.
S&P 500 resistance is 1,149-1,176.97, with especially thick resistance at 1,149-1,158.98. The March, 2002, chart shows well-defined layer of resistance 1166.27-1173.94.
The S&P 500 has support 1142-1134 with a focus 1137-1134. Next support is 1129-1113.
Downside should be limited and higher prices should unfold.
Cherney is chief market analyst for Standard & Poor's