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|  | AUGUST 23, 2004
 TECHNICAL MARKET INSIGHT By Mark Arbeter A Late Summer Low? Stocks were set-up for at least a short-term rally from a technical perspective The market had a pretty decent week, at least from a price basis, as stocks were able to shrug off crude oil's surge to almost $50. There have been some positive developments from market internals, momentum indicators and sentiment of late, but the fact remains that the major indexes remain in intermediate-term declines, and the volume that has accompanied the latest rally has been less than spectacular. Of course, August is not usually known for its trading volume. While one would think that a surge in oil prices to record levels would have continued to weigh on a fragile stock market, stocks were set-up for at least a short-term rally from a technical perspective. Maybe more important, the stock market is a discounting mechanism and investors might see a break in the current spike in crude prices. We agree, and believe that for the intermediate-term, oil has peaked. Any market usually has trouble breaking through big round numbers. Dow 1,000 and 10,000, and Nasdaq 5,000 come to mind. So, $50 may be a key psychological resistance level for oil. Secondly, crude prices have been on quite a tear since the end of June, when they bottomed near $36. The crude oil market is extremely overbought and ripe for some major profit taking. While we are not calling for a long-term top in oil prices, it's possible that crude pulls back to the $40 to $43 area over the next month or so. During the latest move to new correction lows in August, there was a nice improvement in internal market data. The NYSE advance/decline line put in a positive divergence, setting a higher high as the "500" moved to a lower low. The percentage of NYSE new lows was way below the levels posted at the market lows in May. This has given us a short-term buy from this new low data, as the 20-day exponential moving average crossed below the 60-day exponential moving average. This is the first bullish crossover of this indicator since late May. New lows as a percentage of issues traded on the Nasdaq exceeded the readings from May, and this is one of the reasons that we believe the Nasdaq will eventually test the lows traced out in August. Daily momentum indicators have turned positive after moving to extremely overbought conditions. The 6-day relative strength index (RSI) on the S&P 500 recently fell below 20, while the popular 14-day RSI dropped below 30. This was the lowest 14-day RSI reading since the important July 2002 market low. The daily MACD turned higher after falling to its lowest level since March 2003. Weekly RSIs also moved to fairly oversold levels, but did not reach areas seen during the bear market lows in 2002 and 2003. The weekly MACD on the "500" has not had enough time to turn positive, but it is something that we will watch closely. The weekly MACD has been negative since early March. As we have said over the last couple of weeks, there has been a real nice improvement in sentiment data. The Consensus Poll, which measures the percentage of bulls on stock index futures, dropped to only 28% bulls recently, the lowest since the market bottom in March 2003. This compares to a bullish sentiment reading of 81% back in January as the market was peaking. The American Association of Individual Investors (AAII) poll has seen bearish sentiment exceed bullish sentiment for the last three weeks. Even the Investors Intelligence poll has backed away from its bullish extreme, with the latest readings of 43.6% bulls and 28.7% bears. Just six weeks ago, bullish sentiment was over 56% and bearish sentiment was below 18%. There have also been some pretty healthy put/call ratios of late, as fear rose sharply during early August. On Aug. 6, the CBOE put/call ratio hit 1.38, the highest since December, 1994. On that same day, the equity-only put/call ratio spiked to 1.28, an extremely high level. While there are certainly some positive technical signs, the overriding trend of the major indexes remains negative, and until that changes, this fact must be respected. In addition to the negative intermediate-term trend, the indexes have yet to trace out the all-important base or reversal formation. As we have commented on many times, the most common reversal pattern is the double bottom. If the market does trace out an initial low in August or early September, we would expect a test of those lows in October. There is plenty of resistance overhead, and that's likely to limit the near-term upside. For the S&P 500, chart resistance starts to become heavy at 1090 and extends all the way up to 1160. Trendline resistance lies at 1098 with the 50-day exponential moving average at 1099 and the 200-day simple moving average at 1110. A common retracement of 50% of the decline since June 23 would target the 1104 level. The Nasdaq also has heavy supply overhead with chart resistance beginning in the 1900 area, which just happens to represent a 50% retracement of the losses since the end of June. The 50-day exponential moving average comes in at 1882 and the 200-day is up at 1913. Trendline resistance lies at 1940.  Arbeter is chief technical analyst for Standard & Poor's All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
BW MALL
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