More Downside Risk

A retracement is a natural part a bigger advance

By Paul Cherney

There is probably a little more downside risk for the markets.

Referencing 60-minute charts, the NASDAQ has spent enough time under a "line of death" to have raised my expectations for a test of the next lower layer of support. A line of death is simply the lowest point of a sideways consolidation after a swift move higher. This line of death was on 60-minute charts, so the impact of breaking below it should be only short-term in nature. It does not happen every single time, but it happens often enough that when I see a line of death broken I expect to see a test of the next lower well-organized support.

On the 60-minute NASDAQ chart, the next support is 2049.77-2032. If you can view a price chart based on 60-minute price bars here are the dates of the various elements of the line of death: the swift rise occurred Nov. 11, 12, 13. The sideways consolidation which defined the line of death occurred Nov. 16, 17, 18. The support that has a good chance of being tested was established Nov. 5 through Nov. 10.

Even though I expect the S&P 500 support at 1170-1160 to hold on a closing basis, if the index undercuts 1160, downside risk for prints at the next layer of support: 1147-1127. The 1147-1127 area has a focus of support 1144-1138.50.

The intermediate-term technical condition of the market has not changed: the trend for prices remains positive. A retracement is a natural part a bigger advance. End of day momentum measures suggest that any short-term price weakness should attract buyers, not sellers, so downside risk should be limited, but some sideways price action might unfold.

Immediate intraday resistance for the S&P 500 is 1178-1188.46, NASDAQ 2089-2112.18; if either of these resistance levels is exceeded, another leg higher will be in place.

NASDAQ charts based on daily price bars show support 2068-2025 with thick support 2068-2056, this observation combined with the support on the 60-minute charts at 2049.77-2032 makes the 2056-2049 area a focus of support. Next intraday support is 2020.67-2002.

S&P 500 support is 1177-1160, with thick support 1170-1160, the next layer of organized intraday support is 1147-1138.50.

We are at the beginning of what has been historically, on average, the 3 best performing months of the year (November through January). Downside risk should be limited.

Cherney is chief market analyst for Standard & Poor's

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