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Get Four
|  | OCTOBER 11, 2004
 TECHNICAL MARKET INSIGHT By Mark Arbeter The Market Takes a Breather Stocks are once again at a critical juncture and if key support levels hold, a yearend rally could be at hand What was shaping up to be a pretty good week for the stock market turned ugly on Thursday, Oct. 7, as the market reversed to the downside. The major indexes ran into a brick wall of overhead supply and were stopped dead in their tracks. With good areas of support underneath, the damage is likely to be limited on the blue chip averages. We believe the Nasdaq remains in a repair mode with some basing still needed before an extended advance can get started. As we have been saying, the major indexes face a myriad of resistance levels overhead, and this may be causing the choppy action of late. The indexes are attempting to move through areas of thick congestion, created by the sideways trading seen for most of the year. This is likely to take time and may take the form of a slow stair-step advance, as the supply is worked through. The other reason for the pullback last week, especially for the Nasdaq, was that many technology stocks have rallied back to chart resistance from 2003, created by a sideways trading range during the later part of the year. The more damage a stock or index suffers, the more work it has to do to repair its chart and then work through the many pieces of resistance. The S&P 500 hit two formidable pieces of resistance on Wednesday, Oct. 6, and was unable to bust through them. When more than one piece of resistance or support lie in one general area, it makes it tough to break through on the first attempt. Trendline resistance came in at right at 1,142, and this is where the S&P 500 peaked on Wednesday. The trendline is drawn off the peaks that were formed back in April and June. The second piece of resistance came from the peak on June 23 at 1,144. The index will have to crack through this chart resistance to break the string of lower highs and lower lows that the S&P 500 has traced out for most of 2004. Chart support for the S&P 500 comes in at 1,100 with the 50-day exponential moving average and trendline support at 1,114. The 200-day simple average is at 1,120. The Nasdaq hit three concentrated areas of resistance last week before pulling back. The first was the 200-day simple moving average, which lies at 1,966. This was exceeded by only a small margin on Wednesday, Oct. 6, with the Nasdaq finishing at 1,971 before reversing to the downside on Thursday. Trendline resistance, drawn off the peaks in January and June, came in at 1,980. A zone of chart resistance from back in May and June is between 1,965 and 2,048. Chart support for the Nasdaq lies at 1,920 with the 200-day exponential moving average at 1,906. There are two pieces of support near 1,895; one being the 50-day exponential moving average and the other a trendline drawn off the August and September lows. The question of market leadership continues to be an issue for the market and something that must be watched closely in our opinion. Historically, major market advances have been led by growth sectors of the market. This still is not happening with many energy, material and industrial stocks leading the market. According to Investor's Business Daily, groups with the highest percentage of stocks making new highs show an absence of growth stocks. Of the top groups listed, nine come from the energy sector, one from steel, and two from the transportation area. The stock market wasn't the only market to reverse course last week as bonds rallied on Friday after running into trendline support. The 10-year Treasury note benefited from a weaker than expected jobs report Friday and yields headed back toward 4%. Trendline support, which is drawn off the peaks in yields in June and July, held. Therefore, the downtrend in yields since mid-year remains intact and the 10-year appears headed back into strong resistance in the 3.9% to 4.1%. Trendline support lies at 4.25% and the 100-and 200-day exponential moving averages (also support) both lie at 4.28%. After a counter trend rally back into chart resistance, the U.S. Dollar Index got hit on Friday on the weaker jobs numbers. The index, for the second time in seven trading days, broke below an important trendline that has supported prices since February. The next support for the Dollar Index is at 87, with more substantial support down at 85. A break of the 85 level would send the index back to levels not seen since 1995. We believe there is some risk here because weekly momentum indicators have turned bearish. There is excellent long-term support for the U.S. Dollar Index in the 80 to 85 zone. Gold futures, which are a major beneficiary of a weaker dollar surged to their highest level since April, closing above the $424 level. Gold futures are now close to challenging the recovery highs just above the $430 level set back in January and March. A break of the $430 resistance level would target the $460 to $480 zone during the next intermediate-term advance, in our opinion. We believe the stock market is once again at a critical juncture and if the support levels mentioned hold, a year-end rally could be at hand. However, we remain somewhat cautious as plenty of stocks still have more time to base while the process of chart repair plays out. Required Disclosures As of September 30, 2004, SPIAS and their U.S. research analysts have recommended 29.2% of issuers with buy ratings, 58.5% with hold ratings and 12.3% with sell ratings. 5-STARS (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 (Accumulate): 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 (Avoid): 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 (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. 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. Other Disclosures This research report has been 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. 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. The 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. Past performance is not necessarily a guide to future performance. Additional information is available upon request. 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 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.
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