The chances for some sort of a short-term shakeout are starting to build but there is nothing definitive in the indicators right now.
In the overnight systems run after Tuesday's close, a yellow flag of caution was issued for the Nasdaq. Even though the momentum measures based on end-of-day price bars are still technically positive, some conditions which can be associated with a short-term market top are in place.
Some of the formulas included in this yellow flag use total trading volume for the Nasdaq -- this represents a wild-card because indicators which include volume become less reliable during August through the middle of September due to the seasonal decrease in volume -- but the signal was issued and I am reporting it.
Unless other technical conditions emerge, it looks like it would take a Nasdaq close over 1805.14 to declare this flag of caution a failure (a failure meaning "wrong").
The S&P 500 has moved into an area of thick
resistance which has capped prices for two months; the thick resistance for the S&P 500 is 1008-1015. The S&P 500 has exhibited the price pattern which normally follows the overbought signals generated during Monday's session (60-minute bars), so now, there is short-term downside risk for S&P 500 prints between 991-984.
Near the close of trading on Wednesday, the 10-day exponential moving average of the VIX (market volatility index) was 20.33; a move above that level would probably coincide with a brief drop in prices. Downside risk looks limited in the short-term (next few trade days). It would probably take a VIX reading below 19.38 to signal valid strength in the stock markets.
Immediate downside risk (worst case) looks limited to S&P 500 prints 991-984 or Nasdaq prints 1743-1726.
Resistance: The Nasdaq resistance (above 1758) is 1778-1829.58. In Wednesday's session, the index managed to print an intraday high of 1668.52. There is a gap in the price chart which runs 1778.80 to 1796.46. It was created by a downward gap at the opening on Apr. 22, 2002. Sometimes the first print inside a gap like this will draw sellers.
Immediate resistance for the S&P 500 is 1003-1015.41. Its focuses of resistance are 1005-1008 and 1010-1015. The bigger picture of resistance, which was established by price action in June, 2002, is that the S&P 500 has a band of resistance at 1008-1041 with a focus at 1020-1031. If you look at the overlap of resistances, the 1008-1015 layer is a stumbling block for S&P 500 prices.
Supports: The S&P 500 has
support at 991-984, stacked at 985-974 and 976-960.84. I cannot rule out that sometime before the middle of September that 949-912 support will be tested. The S&P 500 still technically has a small chance of printing under 950. These markets have not seen a one-third or a 50% retracement for the move up since March's lows, and retracements like that are common.
The Nasdaq has a broad layer of support at 1758-1722. The index has a shelf of price traffic at 1753-1737, which has to be considered a focus of support. The Nasdaq has stacked support at 1736-1711, 1703-1695, and 1694-1681.31. Cherney is chief market analyst for Standard & Poor's