By Paul Cherney On Tuesday, Feb. 22, there were two headlines that combined to help push stock prices lower. First, the U.S. dollar weakened against other major currencies after word that the Bank of South Korea was planning to diversify its foreign currency reserves (the markets interpreted that to mean shed greenbacks). The second factor was a surge in oil prices, with the April crude contract jumping $2.41 to settle at $51.42 per barrel. (Part of this might have been due to the fact the March contract expired on Tuesday). On Wednesday, Feb. 23, if the dollar strengthens, or oil prices drop dramatically, it would be an intraday or a one-day positive for stock prices.
I think Tuesday's selling was aggressive, and this is a setup for Wednesday. If there is weakness at the open on Wednesday, a drop in prices could represent a short-term capitulation by sellers that might generate a good bounce off the intraday low. But at this time, there simply is not enough evidence to suggest that the selling (on a daily basis) is over.
I would view a lower open on Wednesday as having the potential for a rebound with some good potential for a lift of anywhere from 0.75% to 2% from the intraday low. But the overall daily view for the next few trade days would still be negative. (I would expect more selling, but a decline in oil or a rebound in the dollar would create an intraday atmosphere that would promote short-covering.)
Also, if there is opening weakness on Wednesday (I expect it), a move in the CBOE volatility index, or VXO, above the 13.44 level, or better, the 13.60 level and then a retracement back below either one of these VXO levels would probably coincide with intraday short-covering.
I think the chances are good that a short-term trend lower has started and even though there might be an attempt to rebound that could produce closing gains, I think the damage done is probably going to take more than just a one-day drop to mend.
The Nasdaq composite index has immediate
resistance at 2,036-2,047.
The Nasdaq has had a close under 2,039.72 and this opens the immediate downside risk for a test of the 2,018-2,008 area. At those prices though, short-term, on a first-time test basis, short-coverers will probably book profits (buy to cover which could stabilize prices and might attract other short-coverers). The Nasdaq is inside a layer of
support at 2,039-2,008. Inside this shelf of support there is a focus of support at 2,036-2,024. If there is a close under 2,008, that would be another step in a downtrend and would increase concerns for a test of the next layer of support: 1,980-1,900. The support in this zone starts to thicken at 1,971-1,947.
For the S&P 500 index, immediate resistance is two layers: 1,185.63-1,190, and then stacked at 1,191.54-1,202.48.
The S&P 500 has closed under a critical layer of support at 1,190-1,185.63. I think the chances are high for some small, stairstep movements that have a negative bias as the markets attempt to regain their feet. On the daily charts, there is S&P 500 support at 1,184-1,160. Inside this support are shelves. The biggest support looks like 1,178-1,163; the next support is 1,142-1,090. Cherneu is chief market analyst for Standard & Poor's