A Rally Roadblock?

Monday's session may see a little more upside, but the rise might attract some profit-takers

By Paul Cherney

Some of the buying on Friday, Feb. 11, had to have been short-covering and technical trading on the break above key intraday resistance levels. Those reasons to buy were satisfied on Friday. They no longer represent demand. This raises the possibility that Monday can see a little more on the upside but the rise might attract some profit-takers to cap prices. (That's the short-term view.)

On a more intermediate term view, Friday's action was constructive for the Nasdaq, but the simple fact is that the index has not yet closed above 2,116.75 which is the important top of resistance I see on the chart.

Back at the beginning of the year, Jan. 5 through Jan. 19, the Nasdaq spent 10 trading days between 2,072 and 2,116.75 and that represents a substantial wall of resistance. It might take more than one assault to break-through this barrier.

In my view of the market, it is a favorable condition when the CBOE volatility index, or VXO, is below its 10-day exponential moving average and at the same time the VXO is moving further down, away from its 10-day exponential moving average (widening the spread between itself and its 10-day). That is the case for now. But a move higher in the VXO usually coincides with weaker equity prices, so it would probably not be a positive for stock prices if the VXO reversed course and started heading higher.

Very near the close of trading on Friday, the 10-day exponential moving average for the VXO was 11.76, the 30-day was 12.50. Expect price weakness in stocks if the VXO moves above 11.76. Expect aggressive selling is in place if the VXO moves above 12.50.

For the S&P 500, immediate support is now 1,205-1,191.54 with a focus of support at 1,205-1,199. There is a critical layer of support at 1,190-1,185.63; if this little shelf is undercut, then a stairstep decline might unfold. On the daily charts there is support at 1,184-1,160, inside this support are shelves. The biggest support looks like 1,178-1,163. The next support is 1,142-1,090.

The Nasdaq's immediate shelf of intraday support is 2,073-2,048, with a focus 2,059-2,048. The next support is 2,039-2,008. The Nasdaq 2,039-2,008 area of support has a focus of support 2,036-2,024.

Nasdaq immediate resistance is substantial at 2,078-2,116. There is a focus of resistance inside this band at 2,092-2,106.

S&P 500 resistance is 1,205-1,226.27, with a shelf of resistance 1,205-1,209.53 and another shelf of resistance 1,215-1,226.

I have confidence in referencing historical studies only when my shorter term technical measures are supportive of the historical study. I include the following historical fact because it is true, but that does not mean that it is predictive of the current market.

Historical Fact: In the past 47 years, strength in the first half of February is very common after a down January. Based on S&P 500 data since 1958, 76% of the time, the highest intra-month close for February has occurred on or before the 11th trading day of the month (the 11th trading day this year is Feb. 15). Februaries that follow down Januaries have finished the month lower 65% of the time, so monitoring the VXO is important, because usually, when the VXO is rising, stock prices are falling.

Cherney is chief market analyst for Standard & Poor's

Before it's here, it's on the Bloomberg Terminal.