The markets are reaching extremely oversold conditions and there should be some relief for at least intraday (or even an entire trade day) sometime next week.
Near the close of trade on Friday, the VIX's (market volatility index) 10-day exponential was near 36.31. Even though the VIX remains above this level, It looks to me as if a VIX move below the 37.28 level would probably signal that there is some liquidation of long put positions and the unwinding of those hedges should represent buying demand for equities.
At these high VIX levels it is possible that the markets could see an intraday period of panicked selling which pushes the VIX to prints 40.00 or higher, if that happens and the VIX stops moving higher and starts moving lower, I think prints below 38.79 would probably coincide with a positive intraday tone for equity prices which would represent a short-term squeeze.
The current weight on sentiment (in part) is being fueled by the uncertainties about the Iraq situation and until there is some sort of resolution of that situation, the markets will probably be at the whim of short-term traders (as opposed to long-term investors).
These markets remain susceptible to headlines both good and bad and sentiment can turn in an instant forcing leveraged players to cover and enticing longer-term investors to try the long side.
Thursday's S&P 500 close represented more than a 61.8% retracement of the gains seen from the October lows to the December highs, and this is tilting the scales in favor of a test of support established at the October lows, meaning 806-768. There is no timetable for a potential test of the 806-768 area and a rebound to print 870-890 could unfold on any day.
The Nasdaq has immediate intraday support at 1298-1265, with a focus of support at 1298-1280.
The Nasdaq has a well defined shelf of resistance at 1302.80-1311. Immediate resistance above 1311 is 1333-1345. The index has substantial resistance at 1358-1383.
The S&P 500 has a shelf of resistance at 832-835.72, more substantial resistance is 838-845.88. Next resistance for the S&P 500 is 857-868.62, and becomes thick at 862-868.72. Cherney is chief market analyst for Standard & Poor's