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Short interest figures for the NYSE and the Nasdaq were published over the weekend. The Nasdaq's short interest rose by 1.7% from June 13 to July 15. Even though the NYSE's short-interest contracted overall, in terms of exchange traded funds (ETF), the QQQs (Nasdaq 100 ETF) had the biggest increase in short interest on the Big Board.
This is potentially bullish in the short-term. As mentioned in Friday's column, bears who are still short of this market might start to get worried that any of the reports due this week might offer convincing evidence that the economy is really strengthening. Lifts in prices will bring pressure to bear on the shorts.
On Monday, the VIX (market volatility index) continued to impress. A low VIX in and of itself is not a danger, the potential danger comes when the VIX moves higher. Very near the close of trading on Monday, the VIX's 10-day exponential
moving average was 20.80. Generally, a move above the 10-day is coincident with declining equity prices and a move below it is coincidental with rising equity prices.
The VIX will probably have to stay below 19.92 on Tuesday just to keeps odds tilted against a significant bout of selling.
This week's key economic reports include consumer Confidence on Tuesday, GDP and Chicago PMI on Thursday, and the July employment report on Friday.
I think the big underlying story is the short-interest. This should keep a floor under prices and anytime there is a dip, bears closing out of short positions could easily prevent prices from dropping very far.
On Tuesday, there could be great reluctance to make commitments one way or the other until after the July Consumer Confidence number is released near 10:00 a.m. ET. The Street expects a reading of 85.0: June's number was 83.5.
I would be concerned about a full day of profit-taking if the CBOE Equity-Only Put/Call ratio hits 0.42 or lower as of the close of trade, if that occurs then I would expect that day to be followed by a day of profit-taking.
Resistance: Overhead
resistance appears formidable, but the action of buyers on Friday was impressive and there should be some follow-through.
The Nasdaq is testing the lower edge of its big resistance: 1722-1758. Inside this layer of resistance is a focus of resistance at 1737-1753. This is strong resistance. In Thursday's session, the Nasdaq printed an intraday high of 1740.80 and prices eventually tumbled, in Monday's session, the index printed a high of 1740.59 and was unable to exceed Thursday's session high.
The S&P 500 is testing its big resistance at 988-1015.41. It's focuses of resistance are 993-1000, 1005-1008, and 1010-1015.
Supports: Immediate intraday
support for the S&P 500 is 991-984.85. The S&P 500 has an important layer of support at 988-974. If 974 were undercut without attracting buyers within just a few minutes, that would be a sign that the buyers are not interested at current levels and they are probably going to stand back, waiting for lower prices. This means that if prices spend time (more than 10 minutes) below 974, then I would expect the thin shelf of support at 970-964 to fail and that prices will probably have to test 949-912 support. This scenario would not have to unfold one trade day after another, short-term oversold rebounds in price are a natural phenomenon.
The Nasdaq has immediate support at 1720-1707 with a focus of support at 1715.781-1710. Additional supports are 1703.62-1695.20, then 1687.94-1675.18. The bigger picture for Nasdaq support is 1699 to 1653; there are layers of support inside this broad band including 1686-1653, with a focus of support at 1682-1664, which makes the 1686-1682 area appear critical. Due to the nature of the rise since the March lows, Nasdaq supports are stacked; the next support is 1648-1598.
Point of clarification: In Friday's column, I wrote that the markets might break out (above recently established highs, meaning, the Nasdaq could break above 1776.10 and the S&P 500 could breakout above 1015.41). I think that is very possible, likely even if/when there is a squeeze of the shorts. But I would be concerned that the lift above recently established highs could be an exhaustion of short-term buying demand and if there were a breakout higher, I would increase my focus on possible flaws in the composition of the gains. I would also be paying close attention to the VIX, because a low VIX in and of itself is not a danger, but there is a potential for danger when the VIX starts rising.
Cherney is chief market analyst for Standard & Poor's
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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