Most reversals that lead to sustained trends higher start with a day similar to Wednesday's, when bears start covering shorts and the bargain hunters and momentum players come rushing in, pumping up the volume. Short-covering rallies can last 1 to 4 trading days, then some retracement is natural. These markets might be at that point.
The ideal situation for bulls would be a retracement that recaptures less than half of the gains off the lows and then starts higher again, creating the potential for a bullish ABC pattern.
Sideways price action with weakness in the afternoon might unfold Friday as shorter-term traders who have long-side positions book profits ahead of the weekend.
It is difficult to understand how total trading volume will be able to act as confirmation of this week's reversal in prices (especially during the expected light trading in August ahead of the next convention), but for now, the volume action has been okay.
Wednesday's price action does increase the importance of Monday's lows. If those lows are undercut, follow-through lower seems inevitable. The intraday lows from Monday were Nasdaq 1,829.06, S&P 500 1,078.78.
For now, I still consider downside to be limited to the recent lows. Bulls should want to see any retracement over the next two days to be shallow, and attract buyers that bring volume with them.
The intermediate term
support for the S&P 500 is 1,106-1,076, with a layer of support at 1,085-1,076. Supports are stacked due to the nature of the rise during the fourth quarter of 2003. That rise established thick and well-defined price support at 1,074-1,058.
Immediate support for the Nasdaq is 1,876-1,858, stacked at 1,860-1,829.06. The next focus of support is 1,815-1,792.
resistance for the S&P 500 is 1,103-1,109.30, 1,114-1,119.60, stacked and overlapped at 1,118.56-1,122.37. Well-defined intraday resistance is 1,123-1,130.33 with a focus at 1,124.60-1,127.02.
Immediate intraday resistance for the Nasdaq is a small shelf at 1,886-1,892.98, but the next layer of well-defined resistance does not come until 1,903-1,933, with a focus at 1,909-1,918.
These markets might just trade sideways, limited by Nasdaq 1,829 on the low end and 1,933 on the high end, the S&P 500 limited by 1,078 on the low end and 1,130 on the high end. Right now I assume a positive bias that might experience a little retracement over the next couple of trade days.
Any time resistances are exceeded they must be treated as supports until proven otherwise. Any time supports are undercut they must be treated as resistance until proven otherwise. Cherney is chief market analyst for Standard & Poor's