More Recovery Room for Stocks

Another day of small closing gains is likely -- but that could use up most of the short-term buying demand

By Paul Cherney

A market decline like the one seen on Friday, Apr. 15 -- one that forces a spike higher in the CBOE volatility index, or VXO -- usually ushers in some base building. The extremely oversold condition is a set-up for a rebound, usually in the first two trading days after the VXO spike. That would be Monday and Tuesday of this week.

One problem is that the spike higher in the VXO represents a spike higher in fear, and that often means that the markets do not believe the first attempt to rise and eventually (like at the end of trading on Tuesday), more sellers come in and force prices lower, eventually forming a sideways base after a few trade days. On Monday, Apr. 18, the markets had minor rebounds and that is the norm after a VXO spike. Gains on Tuesday are also likely.

History never repeats exactly and there may have been many other psychological or fundamental headlines affecting the markets at the times of the previous VXO spikes. But right now, based on these observations, I think another day of small closing gains is likely, but that could use up most of the short-term buying demand, and the markets will be waiting for a headline.

VXO spikes occurred on October 14, 2004, August 6, 2004, May 10, 2004 and March 11, 2004.

S&P 500 support is 1,147-1,120. There is a focus of support at 1,142-1,131. This was confirmed in price action on Monday when the S&P 500 printed an intraday low of 1,139.80 and then started to lift.

The Nasdaq has two layers of support that were established in September and October of 2004. These layers are 1,971-1,899.33 and 1,925.85-1,852.59. The overlap is 1,925.85-1,899.33, and this represents very strong support. Monday's intraday low for the Nasdaq was 1,904.27.

Immediate intraday resistance for the S&P 500 is 1,150-1,155.57. More substantial resistance is the former trading range of 1,163-1,193.28, inside this area resistance gets thick with prints 1,167 and higher.

Immediate intraday resistance for the Nasdaq is 1,914-1,928.02, the resistance becomes thicker 1,922 and higher. Additional resistance is stacked at 1,930-1,940.15, then 1,955-1,968.03; the trading range that was broken represents broad resistance at 1,968-2,021.82.

Cherney is chief market analyst for Standard & Poor's

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