A Wednesday Rebound?

The kind of price action seen Tuesday is often a setup for an opening capitulation of sellers in the following session

By Paul Cherney

Both indexes (S&P 500 and Nasdaq) have reached price levels that should act as support for the current decline, namely S&P 500 1,195-1,185, Nasdaq 2,118-2,097. This does not mean that there can't be a move lower in a shakeout, but these markets are short-term oversold now and when I see the short-term readings I am looking at now, there is usually a one day wonder (rebound from oversold) the next day.

I expect to see short-term oversold signals in the overnight systems run. These signals usually mean a one-day bounce from oversold, but I have to warn readers that even though I expect to see an oversold bounce develop sometime tomorrow, the current short-term readings are so negative (a lot of selling jammed into a short period of time) that usually, a bounce in prices is a short-term event and then basing, or another leg lower in prices often follows short-term extremely negative readings (like those created in Tuesday's session).

Even though nothing is ever 100% correct, Tuesday's decline satisfied an awful lot of the sellers (short-term basis) and that is one of the reasons that an oversold bounce can occur on Wednesday, buying can be fueled by short-covering, a lack of sellers (who were satisfied Tuesday), and intraday momentum players.

Tuesday's price action is often a set-up for an opening capitulation of sellers at the following opening (Wednesday's open).

On a more intermediate term basis, the technical case for equities has weakened and longer-term measures of momentum of price and volume have fallen to neutral readings. Usually, under circumstances like this, there is still an underlying willingness to buy which takes a few weeks to be extinguished, but the current readings represent a wild-card in terms of price retracements. Measures of price and volume are no longer at levels that allow me to express an opinion that I think retracements should be shallow in depth and short in duration

The CBOE volatility index, or VXO, did spike above 14.55 and then moved back down below 14.55 so that part of the volatility chart pattern is in place bolstering expectations for a bounce on Wednesday.

This early in the year, I still think the downside is limited and there should be another lift in prices.

Immediate intraday support for the S&P 500 is 1,195-1,185 which should hold on a closing basis on Wednesday. It might provide a platform for another lift into the middle of January. S&P 500 support is stacked at 1,184-1,180.40. The next layer of support is a broad band of prices that overlaps at 1,186-1,167 which is why short-term downside is probably limited, because there is so much price traffic in this area.

The Nasdaq has immediate support 2,118-2,097.86 with thick support 2,113-2,105. Next support is overlapped at 2,112-2,052.80.

Monday's session for the S&P 500 established intraday resistance for the S&P 500 at 1,205-1,209.53. There is more formidable resistance from July, 2001. The older the resistance, the less precise you can be, but here is the read from the 60-minute charts from July and August of 2001: resistance is 1,215-1,226.27.

Nasdaq immediate intraday resistance is 2,132-2,152, with a stacked shelf at 2,155-2,165. This is within the broader resistance based on 60-minute charts from 2001 (old resistances are not as precise as recent chart action) is 2,153-2,181.05, the index has spent some time above the 2,181 level on an intraday print basis, but has not been able to close above this level. In Monday's session the Nasdaq printed a high of 2,191.60 before the sellers became more aggressive than the buyers. This has set a small shelf of resistance at 2,177-2,191. The next layer of resistance for the Nasdaq is 2,202-2,264.48 and there is stacked/overlapped resistance at 2,226-2,328.05 which creates a focus of resistance (strong resistance) at Nasdaq 2,226-2,264.48.

Anytime resistance is exceeded it must be treated as support until broken. Anytime supports are broken they must be treated as resistance until exceeded.

Cherney is chief market analyst for Standard & Poor's

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