Market Ready for a Bounce

But there is not enough evidence to suggest a short-term advance can trend higher

By Paul Cherney

The markets are establishing a base. Major indexes are still overdue for an oversold bounce. I would be more surprised to see prices drop on Tuesday than I would be to see them bounce. I think they should bounce, on Tuesday, but there is not enough evidence to suggest a bounce can trend higher.

Short-term technical measures of volume and price have moderated and this is what is often seen just before a bounce (a bounce of more than just a couple of points up at the close like we saw on Monday), but there would heave to be bigger improvements than the markets have delivered yet to suggest that bulls can just ride prices higher. There has been considerable short-term damage done and usually, the first lift out of a retracement like the one seen over the past 10 trade days does not attract signficant follow-through buying.

Monday's volume was hampered by the fact that it was the first trading day after a 3-day weekend, and European markets were closed.

If the markets continue to offer just these token lifts, then fence-sitting sellers (people who want to sell on a bounce) might become frustrated and simply lose patience. If that happens, we might see a fear-driven sell-off that produces capitulation style selling volume and then reverses intraday to close at or near the open for the day. If we get a bounce and the markets can generate signs of strength, like breaking above substantial resistance levels on good volume measures, then an extension higher would be expected. I expect a bounce higher on Tuesday, but here is what I would like to see if I could write my recipe for a selling capitulation: a hard drop in prices on high volume, then a reversal and on the way back up volume expands. There would have to be a minimum NYSE total trading volume on the day of 1.88 billion, preferably above 1.95 billion. For the Nasdaq 2.43 billion or more. This would be a strong suggestion that many fence-sitting sellers hadgiven up waiting for better prices to exit long positions and had simply capitulated to the sell-side of the fence.

Immediate intraday support for the S&P 500 is 1,179-1,163. The support becomes very thick 1,177-1,170. If the S&P 500 tests 1,169-1,163 again, some short-covering would be expected. A close below 1,163 would open downside risk for a test of the next layer of support 1,147-1,120 with a focus of support 1,142-1,131.

The next well-organized (strong) support for the Nasdaq is 1,981-1,900 with a focus 1,971-1,954.

The Nasdaq has resistance 1,993-2,008.63, stacked and well-defined at 2006-2017.66. Making a focus of resistance 2,006-2,008.63. A close above 2,008.63 might force a wave of buying at the open the next morning. Prints 2,016 through 2,027 are thick with resistance. Next resistances are 2,036-2,059 and 2,047-2,069.42, which makes the 2,047-2,059 area a focus of resistance. Additional resistances are directly over the 2,069 level at 2,078-2,093.68 and 2,101-2,111.43.

The S&P 500 has immediate resistance 1,178.82-1,189.50; there is a particularly well-defined layer of resistance 1,183.78-1,188.40 (generated ahead of the FOMC announcement on Tuesday afternoon). Even though resistance runs to 1,189.50, just a close above 1,180.11 (Thursday's high print) would probably be enough to attract a wave of buying for the following open. Next resistances are 1,190-1,194.84, then 1,199-1,210, resistance gets thick 1,204-1,210.54. There is broad resistance 1,206-1,229.11 which has a focus of resistance 1,213-1,219. Above 1,229, the next layer of resistance is 1,240-1,286 with a focus 1,246-1,261.

Cherney is chief market analyst for Standard & Poor's

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