Technical Analysis: Internals Hold Up

No major deterioration in internals today, and volume was low, both positives. However, sentiment continues to be too complacent, with the VIX (options volatility index, first chart below) down on a down day for the market. Again, higher prices remain possible, but sentiment levels suggest the potential for much lower prices when the market turns. Critical support levels are 900 on the S&P (second chart) and 8325-8370 on the Dow (third chart). 920 and 8522.2 are major resistance levels. On the Nasdaq (fourth chart) support is 1448, 1442, 1412 and 1400, and resistance is 1468 and 1475-1485. The banks (fifth chart) took a beating at 800 resistance today. As we said yesterday, they looked ripe for a fall. 772-773 is critical support. A busy news day tomorrow, with GDP at 8:30, Michigan sentiment at 9:45 and new home sales at 10. The initial first quarter GDP reading is expected to come in at 2.3%, and sentiment is expected to edge up to 85, so the modest improvement could be viewed positively. Finally, a comment on trading options (also applies to any trade). Options trading is risky; every month we report that most options have once again expired worthless. If you’re going to trade them, long-dated, deep-in-the-money options are probably the safest bet (much less time premium to erode), and always choose a good risk-reward set-up with a tight stop. 915-917 on the S&P yesterday was a good place to try a short, for example, because three resistance lines converged in that area. Conversely, buying a breakout or support offers good risk-reward because it gives you a tight stop if the breakout or support fails. Most trades are probably losers, truth be told; the best approach, in our opinion, is to cut losses quickly and let winners run. A final note: There will be no technical analysis tomorrow, but it will return after the close on Monday.

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