Consolidation Appears Likely
By Paul Cherney
Deterioration in volume and breadth measures continued on Monday. The Nasdaq index has had a close below the 2165.44 level. These are negatives. I expect more consolidation and weaker prices to unfold. The markets are overdue for consolidation and price weakness, but near the end of the session on Monday, 60-minute measures were at short-term oversold levels that can precede a lift. So, in the absence of any major overnight headlines, I would expect an oversold lift on Tuesday but then sideways until the Fed makes its post-meeting announcement.
The FOMC meets on Tuesday. The Greenspan Fed has been very good at telegraphing intentions, but for this post-meeting announcement I don't know what the Fed can say that the markets don't already know. The Fed has a pretty consistent record of going one step beyond what is necessary to contain inflation and keep the economy rolling, and that has now resurfaced as a market concern. If the Fed were to specifically address this market concern, that would probably be a short-term positive (doubtful).
At this time, I do not think that a rebound in prices can attract significant followthrough. An oversold bounce could linger sideways for a few trade days, but in my view of the markets, significant upside looks doubtful and profit-taking/consolidation appears likely.
For the S&P 500, I would become concerned about a shift in sentiment if the index posted a close below 1219.80, but what can happen is that money can start to seek refuge in the larger caps, and that can make downside a slow-motion affair; trading in general can become a trendless succession of mostly sideways prices as money jockeys position out of one group and into another. The S&P 500 has strong support under 1219 starting at 1206. The nature of the S&P 500 chart makes it doubtful to me that there can be a huge drop, but conditions right now are not strongly positive.
• Nasdaq immediate resistance is 2171-2175.60, then 2177.85-2185.56, then 2189-2207.79. Resistance is well-defined (strong) at 2201.91-2207.79, then 2211-2249, with a focus at 2211-2233.33; resistance gets thick at 2225-2233. Anytime immediate resistances are exceeded, they convert to supports until proven otherwise.
• S&P 500 intraday resistance is 1227-1232.28, overlapped at 1229-1239.76. This has been a stair-step period of weakness and there are multiple layers of resistance above current prices. A combination of several intraday plateaus creates a focus of resistance at 1238-1241.73, but resistance runs all the way to 1245.81. The next focus of resistance above 1245 is 1249.23-1267.
• Nasdaq supports are stacked, and it is usually difficult for prices to drop through stacked support unless there is a headline of undeniably bearish (or sentimental) impact. The index finished Monday just under 2175-2165.44 (not a positive) but there is another layer of support that runs from 2167-2144.78. A move below 2144 does not find the next well defined layer of support until 2106-2076 (very strong and should hold if tested).
• S&P 500 has immediate intraday support at 1231.79-1223.03. There is a thin shelf at 1219-1215; the next meaningful support is 1206-1183 (very strong).
Cherney is president of Cherney Market Analysis