Back in the Chips?

A favorable book-to-bill report for August could reinvigorate the Nasdaq on Thursday

By Paul Cherney

This is the week of the quarterly expiration of futures (formerly known as the Triple Witch).

Tuesday's overnight systems run produced the first non-confirmations of the rise in prices. These non-confirmations are based on the lack of volume at the higher prices. This is evidence that raises some doubt about the Nasdaq's ability to close at or above the 1,924 level on or before Monday, Sept. 20. Signals like this often precede price weakness, although prices can linger at or near current levels for a couple of trading days before more sellers move into the markets.

There is at least one piece of fundamental news that has the potential to re-invigorate the Nasdaq on Thursday. Part of the recent strength in the markets has been a rebound in the SOX. On Thursday, Sept. 16, the semiconductor book-to-bill ratio is supposed to be reported near noon ET. This used to be a much anticipated "headline" number back in the mid to late 1990s, but now it hardly gets mentioned. The recent trend for this number has been down: Apri1 1.13, May 1.10, June 1.07, the preliminary July number was 1.05. The August number is supposed to be reported Thursday.

Perhaps a lift in this number could spark another little leg higher for the SOX which, if so, that would help the Nasdaq, too. But the simple fact of the matter is that as of Tuesday's market, the higher prices were attracting less buyers and unless there is a mechanical buying spree related to the unwinding of hedges linked to the expiration on Friday, or buying inspired by a strong book-to-bill, then prices might have to retrench for a few days.

The possibility of weakness in the morning and then a lift in the afternoon remains real for the markets on Thursday due to leveraged positions expiring on Friday.

The move of the CBOE volatility index, or VXO, above the 14.04 level is a negative for the markets. If the VXO can move back below the 14.04 level I would interpret that as a sign that hedge unwinding can boost equity prices (short-term meaning one day in this case). Just a VXO move below 14.17 would be a move in the right direction. I point this out because this is the week of the quarterly expirations and as prices move in one direction, certain leveraged vehicles become profitable: if cash prices are down, owners of puts can see an increase in the value of their contracts, as they sell out of the contracts to capture the gains, the other side of the contract might have employed hedges and the unwinding of those hedges can entail going to the cash market and buying the underlying. That is why depressions in price can be followed by lifts during the week of the expirations.

Immediate Nasdaq support is 1,896-1,876, then 1,868-1,840. On Thursday, if prices move below 1,892.00 for more than 4 minutes without attracting buying interest to move prices higher, then even though the immediate layer of support runs 1,896-1,876. Prints below 1,892 for more than 4 minutes open immediate intraday downside risk for prints 1,883 and lower. Nasdaq 1,896 is an important price point because it represents the July high and it was a short-term positive to have the Nasdaq move above that level. Markets often retest levels like this after a move above them.

S&P 500 support is 1,123-1,117, which overlaps 1,118-1,113, making the 1,118-1,117 area a focus of support. Next support is 1,110-1,094.

The S&P 500 is testing immediate resistance at 1,123-1,130.33. This year's June price action established more formidable resistance in the 1,129-1,146.34 area with a focus of resistance 1,132-1,140.

Immediate resistance for the Nasdaq is a small shelf 1,901.77-1,910 but then better defined (stronger) resistance is 1,912-1,933.03. Resistance thickens with prints of 1,919 and higher. The next area of well-defined resistance is prints of 1,960 and higher.

Cherney is chief market analyst for Standard & Poor's

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