A Show of Weakness

With the Nasdaq undercutting 2,074 on Thursday, end-of-day momentum measures may start rolling over

By Paul Cherney

The Nasdaq composite index has made a move lower and undercut the 2,074 level. I think the chances are good that a short-term trend lower is unfolding because the market action on Thursday, Feb. 17, will start end-of-day momentum measures rolling over.

For the Nasdaq, at this time I cannot rule out a move that ultimately undercuts the Nasdaq low of 2,008 (that was established on January 24, 2005). Right now I see a chart pattern that can lead to a leg lower as long as the Nasdaq does not rebound and close above the 2,117 level.

It is a regular monthly option expiration on Friday and the unwinding of hedges on leveraged positions might prevent a movement in either direction from trending very far. Why? As price moves in one direction, leveraged vehicles (options) become worth more and as those leveraged positions are closed out, there is no need for the hedge, an unwinding of hedges causes price to move in the opposite direction.

Very near the close of trading on Thursday, Feb. 17, the 10-day exponential moving average for the CBOE volatility index, or VXO, was 11.60, the 30-day was 12.26. I expect price weakness in stocks if the VXO moves above 11.60. I would guess that aggressive selling is in place if the VXO moves above 12.26. I think it would probably be a positive for stock prices if the VXO moved below 11.25, more preferably a move below 11.10 (chart read).

For the S&P 500 index, immediate support is 1,198.75-1,191.54. There is a critical layer of support at 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 at 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.

On a more intermediate term basis, the Nasdaq has a band of support at 2,073-2,048 with a focus 2,059-2,048. As long as there is not a headline that everyone recognizes as bearish, this price zone should provide a floor for prices, I am guessing, for the day because there is a special situation tomorrow, namely options expiration. Short-term, momentum is turning negative and the charts look unfriendly to bulls, but the potential for a lack of followthrough (either direction) on Friday is explained in the above paragraph about hedges.

The Nasdaq has a critical support level at 2,039-2,008, inside this there is a focus of support 2,036-2,024. A close under 2,008 would increase concerns for a test of the next layer of support: 1,980-1,900. The support in this zones starts to thicken 1,971-1,947.

Cherney is chief market analyst for Standard & Poor's

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