A Nasdaq Slump in the Offing?

Chances are good that a short-term trend lower is unfolding in the index, and its weakness can weigh on the S&P 500

By Paul Cherney

Friday, Feb. 18, was option expiration and much of the tight range trading was probably due to hedges and cross hedges related to the expiration. Because of the special situations in place for an expiration, it is difficult to glean much information from Friday's price action.

I think the chances are good that a short-term trend lower is unfolding in the Nasdaq composite index, and its weakness can weigh on the S&P 500.

If the Nasdaq is going to lead the way lower, I would expect to see a close under 2,039.72 on Tuesday, Feb. 22, or Wednesday, Feb. 23. Nasdaq 2,039.72 was the intraday low on Feb. 11. If the Nasdaq does not have a close under 2,039.72, or, if the Nasdaq moves higher and closes above 2,093.68, then I would have to declare myself wrong in my assumption that a leg lower for the Nasdaq is taking place.

A Nasdaq close under 2,039.72 would just be a step downward that offers some confirmation that the trend is lower. The Nasdaq has support starting right at 2,039, the support runs 2,039-2,008, inside this there is a focus of support at 2,036-2,024. A close under 2,008 would be another step in a downtrend and would increase concerns for a test of the next layer of support: 1,980-1,900. The support in this zone starts to thicken at 1,971-1,947.

For the S&P 500, 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.

Very near the close of trading on Friday, the 10-day exponential moving average for the CBOE volatility index, or VXO, was 11.52, the 30-day was 12.19. I expect price weakness in stocks if the VXO moves above 11.52. I would guess that aggressive selling is in place if the VXO moves above 12.19. I think it would probably be a positive for stock prices if the VXO stayed below 11.08.

Cherney is chief market analyst for Standard & Poor's