Warning Signs for the Nasdaq

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While the intermediate- and long-term price trend are still bullish, with a series of higher highs and higher lows, as well as strong trendline and moving average support still in place, there remain real concerns, in our view. The daily MACD and 14-day RSI have traced out bearish divergences from overbought levels, and the weeklies have done the same. These are the first momentum divergences since spring of 2006, just before the midyear correction. I.T. trendline support lies at 6165 while the 80-day exponential moving average is at 6130.

Intermediate-term chart support is in the 6000 area and also represents a 38.2% retracement of the advance since June. Long-term trendline support is at 6130, and the 40-week average is just under 6000.

There have been some interesting developments as far as market sentiment is concerned during the last couple of weeks. The trend of the total CBOE put/call ratios on a 5-day, 10-day, and 30-day time frame have all flattened out, losing the downside momentum that had been in place since May and June. We think the key for the stock market is the trend of the put/call ratios. When they are trending lower, the market often times does well, and when these ratios trend higher, the market generally has trouble. If the trend of these ratios starts to reverse to the upside, we think it would be another warning of an impending correction.

On the flip side, the OEX put/call ratio, which gives us an idea of what the "smart money" is doing, has remain in the top half of its normal range over the past couple of months, a bearish sign in our view. The OEX p/c ratio is currently at its fourth highest level over the last four years.

Taking a look at the investment polls, there was a recent sharp decline in bullish sentiment in the Investor's Intelligence poll. Bullish sentiment declined to 50.5% from 55.4%, the largest one-week decline, in September, 2005. This period was just before a pullback into the October, 2005, lows. Bullish sentiment on the MarketVane poll has slowly eroded to 68% from a high of 73%. The Consensus poll has seen a quick two-week drop in bullish sentiment to 67% from 75%. We believe these drops in bullish sentiment from very high levels are another warning for the stock market.

Crude oil prices fell to $49.90 per barrel during Thursday's session before rebounding to finish the week at $51.99. We suspect there was some short covering as prices moved down to the psychologically important $50 level. Prices have been in a virtual freefall over the past couple of weeks, and it appears there has been some liquidation selling. As of Thursday's close, crude had plummeted over 17% during the last 11 days, the worst performance since early 2003. Because crude oil prices have plunged so quickly, and it does appear to be a downside capitulation, it is possible that prices will bottom out in the $50 area.

Our initial forecast was for crude to drop to the $45 to $47.50 zone, based on long-term trendline support, chart support, and Fibonacci analysis. With the collapse in prices, momentum indicators are extremely oversold. Before an eventual bottom can be called, we would like to see some positive divergences on the momentum charts as well as a period of basing action that would include a bottoming pattern. A potentially big positive for crude comes from the Commitment of Traders Report. Commercial hedgers are net long the market by the widest degree since March, 2006, while large speculators are net short the market by the widest margin since February, 2006. This period represented an important intermediate-term bottom for crude during 2006. Stay tuned!

The 10-year Treasury yield consolidated just under important support at 4.8% last week, and it looks like yields are poised for higher levels. The 10-year finished the week at 4.8%, just under the recent yield highs from back in October and September. The 4.8% zone also represents a 50% retracement of the decline in yields from June, 2006. There have been multiple positive momentum divergences on the daily and weekly charts, suggesting yields will continue higher. The 10-year just completed an inverse head-and-shoulders formation, a bullish reversal pattern. We think yields will break higher, and get back up into the 5% to 5.25% range.

Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's .