Obviously, if higher oil prices forced the selling in stocks, then a decline in oil prices should produce a lift in stocks, but at this time, we are virtually at the end of the earnings reporting season (good earnings reports being a catalyst for buying) and we are in August (often a time of seasonal weakness), so I would not expect a "never lookback" rally and I would prefer to see some definitive signs of desperation oversold before becoming enamored with the long-side.
I think the damage done has created the potential for a shake-out day for the Nasdaq. A pattern that might unfold would be small-range trading on Thursday, but then the potential for a shake-out day on Friday or Monday.
The S&P 500 did not decline as much as the Nasdaq because the lift in oil prices forced buying in the energy related stocks and most of the big names there have only 3 letters in their ticker symbols (Nasdaq stocks have a minimum of 4 letters in their ticker symbols). The strength in energy related shares helped the S&P 500 today, but if oil prices drop and there is a wave of buying in non-energy related shares, the gains for the S&P 500 could be muted by profit-taking in energy. This balancing act is one of the reasons I think the upside is limited: the energy sector giveth and the energy sector taketh away.
If there is a day or two of broadly based declines, I am pretty sure I will get an oversold reading in one of my NYSE breadth measures. This can produce net positive price action for 5 to 7 or 8 trade days. Some of the end of day indicators I watch are in configurations that accompanied the last time I had one of these oversold breadth signals (nothing is ever exactly the same): after the last signal, the S&P 500 managed to see net positive action, but over the course of 7 trade days it only managed a gain of about 1% (this signal came as of the close 3/29/2005). I do not know whether selling will get bad enough to produce this oversold signal, but if it comes, I consider it a pretty reliable signal.
I was wrong about the oversold bounce being able to allow prices to linger. (S&P 500 prices have stayed relatively unchanged due to the energy stocks.) My view of the markets remains that on an intermediate term basis (a couple of weeks) significant upside looks doubtful and profit-taking/consolidation should cap price advances.
The nature of the S&P 500 chart makes it doubtful to me that there can be a huge drop, but conditions right now are not strongly positive.
Nasdaq immediate resistance is 2165-2185.91; resistance gets thick 2177.85 and higher. The index did manage to print an intraday high of 2185.91 on Wednesday, but on those prints there was no intraday volume expansion, which meant that the higher prices were not attracting more people to the party. Next resistance is 2189-2207.79. Resistance is well-defined (strong) 2201.91-2207.79, then 2211-2249, with a focus at 2211-2233.33; resistance gets thick at 2225-2233. Anytime immediate resistances are exceeded, they convert to supports until proven otherwise.
S&P 500 intraday resistance is 1227-1232.28, overlapped at 1229-1239.76. A combination of several intraday plateaus creates a focus of resistance at 1238-1241.73; in Wednesday's market the S&P 500 moved above 1241.73, printing an intraday high of 1242.62, but resistance runs all the way to 1245.81. The next focus of resistance above 1245 is 1249.23-1267.
Nasdaq supports are stacked, and it is usually difficult for prices to drop through stacked support unless there is a headline of undeniably bearish (or sentimental) impact. Oil could represent such a headline, but that would mean that oil prices would have to move higher. Markets react negatively to uncertainties. It was an uncertainty today when oil prices moved to new historic nominal prints. If oil prices just stayed near current levels (even though they are high) the markets would accept that reality and move on. The Nasdaq index has support 2167-2144.78. a move below 2144 does not find the next well defined layer of support until 2106-2076 (very strong and should hold if tested).
The S&P 500 has immediate intraday support at 1231.79-1222.67. There is a thin shelf at 1219-1215; the next meaningful support is 1206-1183 (very strong). The comments I made about the Nasdaq 2165.44 level (buyers less willing to make a whole-hearted commitment) apply to the S&P 500 1219.80 level, a close below this level would increase expectations for a sideways market, not aggressively positive or negative.