Mixed Signals for the Market

Wednesday's price action may indicate that when oil prices start dropping, stock prices can move higher

By Paul Cherney

All in all, the bears did not really demonstrate a firm command of the market on Wednesday. The day ended with indicators offering mixed predictions for Thursday's session. Wednesday's recovery from the lows in the face of higher oil prices is a new twist for the markets and it forces me to guess that when oil prices start dropping, stock prices can move higher.

It would take a move above 1,808.70 for the Nasdaq or 1,079.04 for the S&P 500 to force me to abandon expectations for closes below last Friday's closes. If these levels are exceeded (Nasdaq 1,808.70, S&P 500 1,079.04) and the CBOE volatility index, or VXO, is printing below 17.30 (Wednesday's low) then the bulls are taking control. If the VXO moves below 16.90, I think there would be a short squeeze in place with panicked bears buying aggressively. Short-squeezes offer the potential for violent upside, but the buying demand is short-term in nature.

Last Friday's closes (August 6, 2004) were Nasdaq 1,776.89 and S&P 500 1,063.97.

There are now two gaps in the Nasdaq's charts: 1,786.65-1,801.88 and 1,806.28-1820.21.

Immediate intraday support for the S&P 500 is 1,072-1,065.92. Longer-term S&P 500 support is 1,063-1,031, with a focus of support 1,060-1,046.

The Nasdaq's immediate intraday support (established Wednesday) is 1,767.95-1,760.50. The index has two immediate concentrations of support inside the the layer of support 1,776-1,600. They are 1,744.60-1,675 and there is a brief shelf of support starting at 1,771 and running to 1,734. This makes the 1,744.60-1,734 area a focus of support and if there are prints in this zone I would expect more aggressive buying to emerge.

Immediate resistance for the S&P 500 is 1,075.85-1,079.04, then 1,086-1,092, then 1,103-1,109.30, 1,114-1,119.60, stacked and overlapped at 1,118.56-1,122.37.

Immediate resistance for the Nasdaq is the newest price gap at 1,786.65 to 1,801.88, then 1,808.42 to 1,820.21. The next substantial resistances are 1,831-1,843.05, 1,848-1,864, and 1,874-1,880.81.

Any time resistances are exceeded they must be treated as supports until proven otherwise. Any time supports are undercut they must be treated as resistance until proven otherwise.

Cherney is chief market analyst for Standard & Poor's

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