The FOMC Litmus Test

We may see just how bullish current sentiment is if Wednesday's Fed minutes contain negative surprises

By Paul Cherney

From Cherney Market Analysis

Volume measures have reached levels that historically have put the odds in favor of additional buying, but markets don't go up every day they're open and at the end of Monday's session, the last hour saw profit-taking dominate trading.

On Tuesday, the minutes from the May 3, 2005, FOMC meeting will be released at 2:00 p.m. ET. The release of the minutes has become as important as the FOMC post meeting announcements.

Part of the fuel for the stock market's rise has been anticipation or speculation that the Fed might be close to stopping its engineered tightening "at a measured pace." Comments in the minutes that contradict these hopes might be a bell-ringer for shorter-term traders to take profits. We can only wait and see. The saying on the Street is that bull markets ignore bad news. If the FOMC minutes make it clear that the committee intends to continue raising rates or if the minutes contain concerns about a real estate bubble, then we will have a litmus test of just how bullish sentiment is. Ignoring bad news is a hallmark of a bull market.

Regardless of whether there is some short-term profit-taking, Nasdaq measures of up volume vs. down volume have reached levels that usually mean a retracement will be viewed as a buying opportunity by the markets. NYSE volume measures have reached healthy levels, although still shy of thresholds that would improve the chances for an extension.

Existing home sales for April are due for release at 10:00 a.m. ET Tuesday. The street expects a 6.9 million annualized rate, a slight increase from the March number of 6.89 million.

• Immediate resistance for the Nasdaq is 2,037-2,100 with a focus of resistance 2,042-2,065, this area is a likely spot for a stall on the first test (test is occurring right now). The intraday high print in Monday's session was 2,062.95.

• The Nasdaq's next layer of resistance (above 2,065) is 2,075-2,103.45 with a focus 2,083-2,093. Resistance starts to thicken with prints 2,073 and higher.

• Immediate resistance for the S&P 500 is 1,198-1,229.11. There is a focus of resistance 1,205-1,215.

• Immediate supports for the S&P 500 are stair-stepped and stacked and it is usually difficult for prices to just slice through supports like these. Supports are: 1,193-1,187, 1,185-1,178, overlapped at 1,182.27-1,177.33. The S&P 500 has additional support 1,173.30-1,166.

• S&P 500 1,184.05 appears to be an important short-term price level, but the index does not appear very vulnerable for dramatic downside if this level is undercut for more than 4 minutes because the S&P 500 has many layers of intraday support, including a well-defined shelf at 1,180.96-1,177.79 which is inside 1,182.27-1,177.33.

• Nasdaq immediate support is 2,042-2,027.48, with especially well-defined support 2,034-2,027.48. Strong markets do not have to retrace very far to find aggressive buyers so I would become concerned about a short-term shakeout if the Nasdaq spent more than 4 minutes below the 2,027.48 level. The first intraday test of a price like this usually attracts buyers for an intraday bounce, but if prices bounce and then roll over and undercut the low price set on the first test, then a descent to the next level of support often occurs. I understand that the Nasdaq has not even tested 2,027, but I am describing this price pattern because it is a possible scenario if 2,027 is tested. A break of 2,027 would open immediate downside risk for a test of 2,015-2,007, but really support runs all the way to 1,989.

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Cherney is president of Cherney Market Analysis