Higher Prices Remain Likely

Reports on the housing sector and the Philadelphia Fed's index of economic activity could drive prices Thursday

By Paul Cherney

From Cherney Market Analysis

On Thursday, at 8:30 a.m. ET, reports on housing starts and building permits for May are due, followed by the Philadelphia Fed report at noon ET. On Wednesday, it was reported that NAHB Builder Confidence hit a new high for 2005, so the prospects for strong housing starts and building permits looks high, good numbers here should push the homebuilders higher. The Street expects May housing starts to be at a 2.05 million annualized rate.

This is the week of the quarterly expirations (formerly known as the Triple Witch), and volatility rarely happens on the actual day of the expiration anymore, so Thursday still has potential to see a move out of the 6-day trading range. I think prices will move higher, but this is expiration week and it is a quarterly expiration so there are hedges and cross hedges in place that often can limit the extent of a run in either direction. Why? When prices make a move, options contracts benefiting from that move (either up or down) become worth more money and when those contracts are closed out, hedges to protect against adverse movements are unwound and that can force prices in the opposite direction of the move. I think that was a factor in Wednesday's markets as prices jumped at the open, making call contracts worth more, causing profit-taking and the subsequent unwinding of hedges, prices moved lower, only to make put contracts worth more, forcing profit-taking and the unwinding of hedges which might have contributed to the intraday reversal and move up off the lows. Something like that can still happen on Thursday.

The Nasdaq's 6-day trading range has been bounded by 2079.13 on the upside and 2052.96 on the downside.

The S&P 500's 6-day trading range has been bounded by 1207.53 on the upside and 1191.09 on the downside.

I don't think the markets have exhausted the upside yet, but I do recognize that a short-term shake-out could happen in reaction to headlines at anytime. I'll watch the ranges and expect that if there is a break lower, that it will ultimately be viewed as a buying opportunity.

Short-term, the markets are consolidating some of the gains achieved since April. Strong markets do not have to move lower to attract buyers, so it was not the greatest of signs Wednesday when prices moved lower, but that could have easily been related to the expiration. There is still potential for higher prices without a retracement that undercuts Nasdaq 2052.96 or S&P 500 1185.19.

This is still the case: The measures of buying and selling pressure I keep (up volume versus down volume) are no where near the levels of strength exhibited in the fourth-quarter rally of 2004, but the readings have registered thresholds that make me expect to see closes higher than those in place. I become concerned about being wrong about the willingness to buy short-term dips in price when and if the Nasdaq posts a close that represents a loss of 2.5% from its highest close. For the current market, that would be equivalent to a Nasdaq close under 2045. I also like to employ observations of chart support and in my view of the Nasdaq, the key chart support is 2042-2027. So, even if there is a close under Nasdaq 2045, the Key chart support for the Nasdaq is 2042-2027 and this is the area that is most likely to attract buyers (if prices were to move that low).

Immediate Intraday Resistances:

• Immediate Nasdaq intraday resistance 2069.04-2079.13, inside this zone there is a focus of resistance 2073.97-2077.74.

• S&P 500 immediate intraday resistance is a small shelf 1206.56-1208.85.

• When resistances are exceeded they are considered supports until they prove otherwise.

Additional Resistances:

• Nasdaq: The next important resistance is 2083-2097.80 with an especially well-defined resistance 2089-2095.96. Nasdaq resistance actually runs to 2072-2103.45, next layer above 2103.45 is 2106.19-2116.75.

• S&P 500: resistance includes a broad swath 1205-1217 with a focus 1211.23-1215.58. Next layer 1221-1229.11.


• Nasdaq supports are: 2066-2052.96. If the Nasdaq undercuts the 2052.96 level for more than 4 minutes without attracting buyers, downside risk increases for a drop to test 2043-2027. The index has thick support starting at 2043 and running to 2027. IF prices move lower and test support at 2043-2027 this area on the chart should attract buyers for a rebound. Whether that rebound attracts enough follow-through to push prices above recent highs can only be assessed when the levels of participation in the rebound are measured.

• The S&P 500 has numerous layers of support and it is usually difficult for markets to just slice through layers of support like this. Immediate intraday support for the S&P 500 is 1205-1200.12 stacked at 1199.11-1197.86, stacked at 1197.39-1191.03, there is a layer of support that overlaps at 1194-1185.19 which makes the 1194-1191.03 area a focus of intraday support.

• There would be some concern for a short-term (one day, or intraday) shake-out if the S&P 500 spent more than 4 minutes below the 1185.19 level, but supports are stair-stepped and stacked, offering numerous price levels to entice buying participation. The support of 1194-1185.19 is overlapped at 1187-1180.87 which creates another focus of support 1187-1185.19. A move below 1180.87 would not be healthy, and could ignite some fear driven selling, the next layer of substantial support, though, is directly underneath 1180.87 at 1178.87-1165.

I still expect that sometime over the next 11 trade days, there should be an S&P 500 close at or above the 1215.00 level and a Nasdaq close at or above 2119, but i would not want to see any closes below S&P 1185 or Nasdaq 2027 because in my view of the current markets, that would increase the chances that a rebound would not be able to exceed the recent closing highs. These markets have spent enough time moving sideways, they have to move higher now, because if they move lower and undercut the levels mentioned above, then they turn the entire sideways price action of the past 3 weeks into resistance and I consider tight lateral price traffic to be strong resistance once it is undercut.

Disclaimer: Use of the information provided by Cherney Market Analysis, Inc., is subject to the Terms of Use contained on its website, paulcherney.com.

Cherney is president of Cherney Market Analysis

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