It is still my expectation that the immediate levels of support will hold. I just have not seen enough signs that the sellers have tossed in the towel, or that the buyers are becoming aggressive. There is usually a basing process that has to play out, but it must be recognized that some of the weakness we have seen over the past couple of trade days has been a discounting of the potential destruction that could be caused by Rita and if that proves not to be the case, that would probably force a period of aggressive short-covering.
We don't know what Rita will do, but the markets know that after Katrina there was almost a 3% lift in the S&P 500 from its close on the Friday before Katrina, the Nasdaq also gained roughly 3% over the same period.
There is a psychological aspect of the current situation: the stock markets have been conditioned by the positive reaction to the devastation of Katrina to expect some sort of a relief rally. This memory is fresh in the minds of traders and there can be some anticipation of a similar relief rally that can prevent prices from moving significantly lower as traders position themselves on the long-side risking short-term downside for the sake of a relief lift.
What happens if Rita makes a direct hit on Houston and wreaks havoc to the offshore platforms and pumping facilities? There is a real possibility that the Fed could acknowledge the events and offer statements effectively making it clear that they stand ready to insure continued economic growth.
I think I would be wrong about a short-term basing process if the S&P 500 managed a close above 1231.27, Nasdaq 2162.14.
The Nasdaq has intraday resistance 2118.13-2139.17, then important resistance 2155-2162.09, resistance is thick 2158-2163, resistance is formidable 2165-2186.83, with a focus 2177-2186.83.
S&P 500 intraday resistance is 1218.99-1225.61 then 1232.15-1236.49. The index has formidable resistance at 1229-1242.62.
Nasdaq major support is 2106-2039, and it is a critical support, that, if broken would open the downside for sub 2000 prints. I expect this level (2106-2039 to hold). Inside the 2106-2039 support layer, there is a focus of support 2106-2072 and this is still a likely spot for the markets to make a stand. Inside this zone is a focus of measures 2087-2072 and prints inside this area should compel short covering.
The S&P 500 has well-defined support 1206-1165 with a focus of support 1206-1183. This is a very strong layer of support and is expected to hold.