I can't really put much credence in volume measures on Fridays or Mondays during the summer months. It's 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 so far, there have been enough of the right things happening in terms of volume and price that the chances for a base and a small price trend higher still seem more likely than a sharp drop under Monday's lows.
Wednesday's price action, though does increase the importance of Monday's lows. If those lows are undercut, followthrough lower appears inevitable. The intraday lows from Monday were NASDAQ 1829.06, S&P 500 1078.78.
For now, I still consider downside to be limited to the recent lows. Bulls should want to see any retracement over the next couple of trade days to be shallow, and attract buyers that bring volume with them. In my view of the charts, it would be better to see buyers come in at S&P 500 prices higher than 1091 and NASDAQ higher than 1862 -- these represent 50% retracements of the lift from Monday's intraday lows to Friday's intraday highs.
The intermediate term support for the S&P 500 is 1106-1076 with a layer of support 1085-1076. 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 1074-1058.
Immediate intraday support for the S&P 500 is 1100-1095.82.
Immediate intraday support for the NASDAQ is 1884.53-1876.31. Support for the NASDAQ is 1876-1858, stacked at 1860-1829.06. The next focus of support is 1815-1792.
Immediate resistance for the S&P 500 is 1103-1109.30, 1114-1119.60, stacked and overlapped at 1118.56-1122.37. Well-defined intraday resistance is 1123-1130.33 with a focus 1124.60-1127.02.
Immediate intraday resistance for the NASDAQ is a small shelf 1886-1896.31. Well-defined resistance does not come until 1903-1933 with a focus 1909-1918.
These markets might just trade sideways, limited by NASDAQ 1829 on the low end and 1933 on the high end, S&P 500 limited by 1078 on the low end 1130 on the high end. Right now I assume a positive bias that might experience a little retracement sometime 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.
A reminder from Thursday: 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 trade 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. Cherney is chief market analyst for Standard & Poor's