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Get Four
|  | OCTOBER 25, 2004
 TECHNICAL MARKET INSIGHT By Mark Arbeter A Turning Point for Stocks? The market may be on the verge of an important change as money slowly rotates back into growth issues While the major indexes appeared to do very little of significance last week, equities are exhibiting visible signs of a transitional phase as money is slowly rotating back into growth areas of the market. It is still very early in this shift to growth, but if it continues, it would be a bullish sign for the market, in our opinion. In looking at the comparative relative strength of the Nasdaq and the S&P 500, a clear pattern emerges. From October, 2002, until January of this year, growth investing dominated with the Nasdaq outperforming the S&P 500 during that entire period. When the market peaked in January, the S&P 500 took over, outperforming the Nasdaq for most of the year. There seems to be another push back into the growth areas of the economy as the Nasdaq is once again outperforming the "500". Also included in the chart is the moving average convergence divergence (MACD) of the comparative relative strength chart. The weekly MACD just crossed its signal line, giving the first bullish signal since 2002. This momentum indicator gives us confirmation that a change in trend may be at hand. Historically, the stock market has performed much better when growth stocks are leading the advance. Support and resistance levels for the major indexes remain little changed as the sloppy action continues. For the S&P 500, near-term chart support lies between 1,094 and 1,100. The 200-day exponential moving average lies at 1,101. Below here, chart support comes in at 1,080, which was the lows seen in May, and 1,060, or the lows from August. On the upside, chart resistance is in the 1,130 to 1,140 area, or the recent highs posted during September and October. The 200-day simple moving average lies at 1,120, and trendline resistance, drawn off the highs in April and June, comes in at 1,140. The most important piece of resistance for the S&P 500, from an intermediate-to long-term perspective, is up in the 1,160 area. The high close for the recovery off the bear market lows in 2002 and 2003 was 1,158, which was posted early this year. In addition, a 50% retracement of the entire bear market comes in at 1,161. A break of this area, in our opinion, would clear the way for a run up to the next Fibonacci retracement of 61.8%, which equates to a target of 1,253. The action on the Nasdaq can best be described as prices being pulled into the narrow section of a funnel. The index is basically caught between contracting areas of support and resistance. A downward sloping trendline has contained prices since the beginning of the year while an upward sloping trendline has supported prices since the lows in August. These trendlines will converge around Nov. 9, a full week after the Presidential election. We believe a resolution the current market doldrums will be resolved by then. Besides these two trendlines constraining prices, the Nasdaq is also caught between the 50-day and 200-day exponential moving averages just below current prices and the 200-day simple moving average just overhead. Chart support becomes thick just under the 1,900 area, with additional chart support from the September low down at 1,860. Overhead, there is a concentrated zone of resistance in the 1,970 area. Chart resistance from the peak in early October lies at 1,971, and trendline resistance comes in at 1,970. Momentum indicators for the Nasdaq have turned higher after moving to oversold levels. The weekly MACD turned bullish on the Nasdaq after moving below zero. This is the first time that the weekly MACD has given a bullish signal from below zero since October, 2002. The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD, in this case, is the difference between a 26-week and 12-week exponential moving average, plotted on top of the signal line, which is a 9-week exponential moving average. As we have talked about recently, the U.S. dollar index has broken down out of a symmetrical triangle pattern on the weekly charts, and is setting up for a very important test of the bear market lows at 85. Chart support from the lows early this year at 85 will be an important area for the U.S. dollar and its implications on other markets. If the dollar were to break below the 85 level, it would send the index back to the lowest price since 1995. We continue to believe there is some risk here because weekly momentum indicators are bearish. There is excellent long-term support for the U.S. dollar index in the 80 to 85 zone so the damage might not be too severe. Gold futures continued to rally last week, as the metal is a major beneficiary of a weaker dollar. Gold remains in an uptrend after bottoming out in May. Since early in the year, gold has traded in a wide range between $370 and $433. Gold is close to challenging the recovery highs just above the $430 level set back in January and March. In our opinion, a break of the $430 to $433 resistance area would then target the $460 to $480 zone during the next intermediate-term advance. Crude oil futures blasted over the $55 level on Friday, Oct. 22, reaching one of our targets. The market is very extended and overbought so we would not be surprised to see some type of pullback/correction sometime before the end of the year. If not, we think it will be hard for the equity market to make much of a push higher from here. 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 to Standard & Poor's. 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. Readers should note that opinions derived from technical analysis may differ from those of our fundamental recommendations.  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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