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There are three important studies now at play in the market. Of all three of the following conditions, I think that the VIX's cross down through its 10-day moving average (Item No. 3) is the most important for the immediate future.
1) As discussed previously, on July 24, the number of new 52-week lows on the NYSE represented more than 20% of the total issues traded, and in the wake of such extreme readings, there tend to be multiple retests of the price range on the day of the 20%-plus reading. That means historical odds are still in favor another of S&P 500 print at 844 or lower (the July 24 price range was 844-775).
2) My studies on price action in the first 10 trade days after Labor Day keep the odds in favor of some weakness this week. Under the current technical conditions (down into the Labor Day weekend when compared to prices 44 trade days prior), there is a tendency for the S&P 500 to see its best closes on the fourth or fifth trade day after Labor Day. Friday, Sept. 6, was the fourth trade day after Labor Day, Monday, Sept. 9, was the fifth. After that, there is a tendency to see price weakness with historical odds 3 in 4 (75% of the time) that the index will close lower on the 10th trade day after Labor Day than it was on the Friday before Labor Day. For this market that 10th trade day after Labor Day would be Monday, Sept. 16, and it would mean that the S&P 500 would have relatively high odds of closing that day under 916.07 (its close from Friday Aug. 30).
3) The VIX was near its 10-day exponential moving average. (This comment was written very near the market close and the prices can fluctuate so it is unclear right now whether the VIX crossed down through its 10-day exponential or not). The following commentary applies as if today was the cross: This has longer term positive implications, but after reviewing price performance in the first 10 trade days after a crossing lower, there is also short-term downside risk. In the 15 occurrences since 1986, only three of those crosses lower saw the S&P 500 just take off like a rocket without closing lower than it was on the day the VIX crossed below its 10-day exponential, so that means that in the first 10 trade days after the VIX crosses down through its 10 day exponential, that the odds are about 8 in 10 that there will be closes which undercut the close on the day of the cross.
The worst closing performances tend to happen in the first few trade days after the cross. By the 10th trade day after the cross, the S&P 500 has had closing gains 12 out of 15 times (80%) of the time. Eight in 10 odds are the kinds of odds you want to take, not give. The biggest gain as of the 10th trade day after the cross has been +10.05%, the smallest gain has been +0.50%. When measuring prices from the close of the cross to the close of the 10th trade day out, there have been 3 series of data with losses, they were -0.40%, -1.59%, and -3.45%.
If you look at closing prices inside the 10 trade days following the cross, the average down close for the S&P 500 was a loss of 2.4% (from what would be Monday's close) and on average it occurred 3.7 trade days after the VIX's cross which for this market would be Thursday or Friday.
Monday's gains were not impressive in terms of total volume which suggests that the sidelines are still filled with people who remain cautious, but I think they will ultimately convert to willing buyers.
Support: Immediate support for the S&P 500 is 898-889 and 890-875. Substantial support is 876-833, with a focus of support 868-854.
Immediate support for the Nasdaq is 1303-1294 then 1280-1265.
Resistance: Immediate intraday resistance for the S&P 500 is 909-928 focus 915-923.
Immediate resistance for the Nasdaq is 1319-1346.
Cherney is chief market analyst for Standard & Poor's
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