Waiting on Greenspan

Prices might move sideways ahead of the Fed chief's testimony Wednesday

By Paul Cherney

Prices might move sideways as market participants wait to see if Federal Reserve Chairman Alan Greenspan's testimony before Congress on Wednesday, Feb. 16, and Thursday, Feb. 17, can deliver an inspirational headline. Total trading volume on Monday was pitiful. Overall, there is a slightly positive bias in place for both the Nasdaq composite index and the S&P 500 index. But I would describe the markets as susceptible to a headline (in either direction).

The tight-range trading on Monday, Feb. 14, has established price ranges which, if exceeded in either direction, should produce a little move in that direction.

The Nasdaq's intraday range has been 2,085.12 on the top side, 20,66.58 on the bottom side. The Nasdaq is inside a band of resistance that runs 2,078-2,116. If the Nasdaq manages to move above 2,085.12 for more than 4 minutes, the next hurdle would be a move above 2,095.64 for more than 4 minutes. That would suggest that buyers are wresting control of the markets for another little leg higher. Next big hurdle would be prints above 2,116.75.

The S&P 500's intraday range over the past day and a half has had an intraday high of 1,208.38 on the upside, but the resistance that is being tested right now runs to 1,209.53 and it would take 4 minutes above that level to increase the chances for a test of the next little shelf of resistance at 1,215-1,226. All of these resistance shelves are inside a broad band of resistance that is 1,205-1,226.27.

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). This relationship is wobbly right now. 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 started trending higher. Price action is more important than the VXO, so if the S&P 500 and the Nasdaq are moving above shelves of resistance, that converts those resistance levels to supports until proven otherwise (regardless of where the VXO is). But it is usually not a good omen for stock prices when the VXO is rising.

Very near the close of trading on Monday, the 10-day exponential moving average for the VXO was 11.73, the 30-day was 12.44. I expect price weakness in stocks if the VXO moves above 11.73. I would guess that aggressive selling is in place if the VXO moves above 12.44. I think it would probably be a positive for stock prices if the VXO moved below 11.30, more preferably a move below 11.06 (chart read).

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

In addition to the intraday importance of 2,066.58 trading range support explained above, the Nasdaq has a band of support 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. When you combine this observation with the intraday trading range observation explained above, the overlap of the trading range and the 2,092-2,106 resistance makes the 2,092-2,095.64 area a focus of resistance.

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

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