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Get Four
|  | DECEMBER 20, 2004
 TECHNICAL MARKET INSIGHT By Mark Arbeter The Consolidation Continues The major indexes are having a tough time overtaking key resistance levels Last week was another frustrating one for investors as the decimation of pharmaceutical stocks along with a strong rebound in oil prices kept a ceiling on the market. While we have been warning about the possibility of some short-term market weakness, we still believe that stocks will move higher over the intermediate term. The price charts of many of the major pharmaceutical stocks continue to trace out negative, long-term patterns. The drug stocks have traced out a series of lower highs and lower lows since the major peak in 2000, and have shown clear distribution by institutions over that period. The group had a tremendous run after bottoming out in 1993 and 1994, and in our opinion, were over-owned by institutions and over-loved by the analytical community. Even after all the weakness and negative news over the last couple of years, there are few sell recommendations on the stocks. We believe the group is likely to remain weak until there is more bearish sentiment toward the group. As we talked about in our last column, the major indexes all ran into some key resistance levels, and are having a tough time overtaking these key levels. The Nasdaq moved up to the highs from earlier in the year in the 2,150 area, and actually made a new high for the year before pulling back. The first crack at moving through an important chart resistance level is often a failure, but we believe the Nasdaq will keep knocking on the door and eventually break firmly above the 2,150 zone. Above this level, chart resistance, from all the way back in 2001, is up between 2,250 and 2,328, with the next layer starting at 2,300. Our next target for the Nasdaq, based on a Fibonacci retracement of 38.2% of the bear market and chart resistance is up in the 2,500 to 2,600 zone. Chart support begins in the 2,075 area and is thick down to the 2,000 zone. The Dow Jones industrial average also advanced to near its high for the year and ran out of gas within an area of chart resistance between 10,600 and 10,700. The S&P 500 failed near 1,200, chart resistance from back in 2001 and a piece of psychological resistance. Our intermediate-term target for the S&P 500 remains 1,253, arrived at with both a chart measuring technique based on the width of the latest consolidation and the next Fibonacci retracement of 61.8% of the bear market. Chart support for the "500" is pretty thick from 1,160 down to 1,100. The peak in momentum for the Nasdaq index occurred back in the middle of November, and at that time, we demonstrated just how overbought we thought the index was on a daily basis. The 15-day rate of change (ending Nov. 15) on the Nasdaq hit a very overbought level of 9.4%, the highest reading after a pullback/correction since August, 2003. During that same period, the 65-day ROC on the Nasdaq was at 19.2%, the highest in over a year. While overbought technical readings at the beginning of a rally have been positive for the market on a historical basis, there is the danger that the markets will pause or correct in the near term. Volume data back in the middle of November was also showing that the Nasdaq was overbought or extended on a short-term basis. There had been a disproportionate amount of advancing volume versus declining volume of late, and this data is signaling that there could be a pause in the latest advance. The 10-day moving average of declining volume divided by advancing volume on the Nasdaq has once again approached zero, an area that has preceded many market pauses and corrections. The 10-day D/A volume on the Nasdaq fell to 0.62, the lowest level since the beginning of June. Looking at the intermediate-term, the 37-day moving average (smoothed) of D/A volume on the Nasdaq continues to fall, and has dropped to around 1.1, the lowest since back in March, 2000. Crude oil rebounded sharply last week after correcting all the way back to the $40 area. Oil prices retraced about 50% of the advance from September, 2003 until October, 2004. This degree of correction is quite common during a strong, long-term advance. There was also chart support in the low $40 area as this was the high for crude back in May and was also the lows seen in September. In addition, the 80-week exponential moving average came in just below the $40 level. Crude oil futures rose above $46 on Friday, Dec. 17, finishing the week with a strong gain. Near-term chart resistance begins at $45.50 and runs up the $50 area. Both the 50-day and 80-day exponential moving averages lie at $46.50 and this is also considered resistance. Important chart support is at $40 while long-term trendline support comes in at $37. This trendline is drawn off the important lows from 2001 and 2003. In our opinion, the long-term trend in oil prices is still bullish but prices will likely have to trace out some sort of basing pattern before the long-term trend in prices can reassert itself. The yield on the 10-year Treasury bond, after falling to almost 4%, reversed sharply on Thursday and finished the week at 4.21%. (Treasury prices fall as yields rise, and vice versa.) We continue to forecast higher yields for the bond market and believe yields are in a basing process that could quickly end. For the near-term, chart resistance lies down near 4% with chart support up at 4.4%. Looking at the weekly chart, yields have moved progressively higher since June, 2003, putting in a series of higher highs and higher lows. The 40-week cycle, which has done a good job of projecting lows over the years, in our opinion, forecast a low for yields last week. If this cycle is correct once again, we believe yields could easily move back to the levels seen in May and June in the 4.6% to 4.8% area over the next 3 to 6 months. We would note, however, that past performance is not necessarily indicative of future results. Required Disclosures 5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis. 4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis. 3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis. 2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain. 1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis. As of September 30, 2004, SPIAS and their U.S. research analysts have recommended 29.2% of issuers with buy recommendations, 58.5% with hold recommendations and 12.3% with sell recommendations. All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Additional information is available upon request to Standard & Poor's, 55 Water Street, New York, NY 10041. Other Disclosures This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS. Disclaimers This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.  Arbeter, a chartered market technician, is chief technical strategist 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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