Stocks: Between a Rock and a Hard Place

We're still looking for some price testing of the recent lows, and then we think the market can once again start to head higher

by Mark Arbeter From Standard & Poor's Equity Research

The major indexes have all bounced off their respective lows, but we believe the stock market is now caught between a rock and a hard place. In other words, there's strong resistance overhead along with what looks like a fairly strong floor underneath. So, over the next couple of weeks, we're still looking for some price testing of the recent lows, while over the intermediate term, we think the market can once again start to surprise on the upside.

We will review the key pieces of resistance for the S&P 500 and then take a look at the overhead facing some of the other key indexes. Trendline resistance, off the recent highs, sits at 1464. Another trendline, off the lows since last summer, and formerly support, comes in at 1468. Chart resistance lies in the 1460 area as well as up in the 1490 to 1503 range. The 50-day exponential moving average is at 1481, while the 65-day exponential average sits at 1483. Some key Fibonacci retracement levels sit near or just above current price levels. A 50% retracement of the correction (using intraday high and low prices) targets the 1463 level, while a 61.8% retracement lies at 1485.

The zone of chart resistance that the S&P 500 is currently in could be a problem, at least for the near term. That's because there were some heavy volume days as prices rebounded off of the Aug. 3 low. The counter trend rally that occurred from Aug. 6 to Aug. 8 saw heavy volume on the upside, so this range of buying may provide some stiff overhead. The range of this heavy buying sits between 1427 and 1504. We doubt very much whether the index can take this area out on the first attempt, and think the S&P 500 will have to back up and recharge its batteries before retaking this zone.

We think the Dow Jones Industrials faces some clear headwinds as well. Chart resistance is fairly thick right at 13,260 and that's very close to current prices. The block of heavy buying sits in the 13,159 to 13,696 range. The 50-day exponential moving average lies at 13,360, while trendline resistance off the recent highs comes in at 13,370. A 50% retracement of the more than 1500 point decline (using intraday prices) targets the 13,270 level, while a 61.8% retracement lies at 13,447. So as you can see, there's a confluence of resistance between 13,260 and 13,696.

While chart resistance for the Nasdaq is not as heavy or well defined relative to the S&P or the Dow, there are a host of technical resistance points that come in very close together, and very close to current prices. Trendline resistance off the recent peaks lies at 2552 and the index stalled at this line on Thursday. A 50% retracement of the correction and using the intraday high and low, targets an initial move to the 2556 area while a 61.8% retracement comes in at 2596. The 80-day exponential average sits at 2566, or very close to Thursday’s intraday high, while the 50-day exponential lies at 2572 and the 50-day simple average is at 2601. Chart resistance, from an area of heavy buying during the counter trend rally from Aug. 6 to 8, runs up to 2628.

The Russell 2000, which appears more advanced than the bigger cap indexes in tracing out a potential reversal formation, has also run into some key pieces of overhead resistance that may stall the current advance. The small cap index appears to be tracing out a bullish, double bottom, as the Aug. 15 and 16 price test of the Aug. 3 and 6 low was successful. However, to complete the double bottom, the Russell 2000 must close above the interim high at 803.51. The 50-day exponential lies almost exactly at this level, coming in at 804. Chart resistance above the 804 area is fairly thick, and runs from 808 all the way back to the all-time high of 855.77.

Expanding beyond our beautiful shores, we see some generally good signs from some of the global indexes we monitor. The one that comes to mind immediately is the action over in Asia. The Hang Seng index and the iShares FTSE/Xinhua China 25 index (FXI) acted as leaders during June and July, and while underperforming during the recent correction, are back again in a leadership position.