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Get Four
|  | SEPTEMBER 27, 2004
 TECHNICAL MARKET INSIGHT By Mark Arbeter A Change in Direction The recent declines may mark the beginning of some corrective action for the market The stock market reversed sharply on Sept. 22, and in the process, broke some important short-term supports. The reversal occurred as the three major indexes all ran up to the top of their respective downward sloping channels. We suspect that this turnaround in the market is the start of the testing and basing phase that we have talked about of late. The Dow Jones industrial average was the first major index to run up to the top of its channel. The intermediate-term trendline for the DJIA started with the peak in February up above the 10,700 level. The subsequent peak was in the 10,500 area and this occurred in June. The DJIA hit this downward sloping trendline two weeks ago, and the index has pulled back ever since. The S&P 500, like the other major indexes, remains in an intermediate-term downtrend, as the pattern of lower highs and lower lows continue. The indexes main overhead trendline or resistance is drawn off the peak in March right above the 1,160 level. The next peak for the S&P 500 was in June at 1,145. The trendline is currently in the 1,132 zone, and until this line is taken out, the trend for the index will remain lower, in our opinion. The Nasdaq ran into intermediate-term trendline resistance on Sept. 21 and reversed quite sharply. The bearish trendline has contained most of the action since the beginning of the year with the initial point in January at 2,150. Subsequent peaks for the Nasdaq occurred in April at 2,080 and in June at 2,020. This important piece of resistance now lies at 1,916. From a shorter-term perspective, the indexes were in fairly narrow up trends since bottoming out in mid-August. These short-term trends were violated on Wednesday. The downside action was accompanied by an increase in trading volume, not a good sign in our opinion, and may mark the beginning of some corrective action for the market. If the stock market does turn lower from here, which we expect, we do see some relative outperformance by the blue chip indexes versus the Nasdaq. For instance, we are not forecasting a full retest for the S&P 500 all the way back down to the mid-August lows of 1,063. This is due to the neutral to positive chart action of many non-technology stocks and the continued strength in the NYSE breadth figures. We also might add that the rally in the bond market could support many financial and higher paying dividend stocks on the NYSE. One potential downside target zone for the S&P 500 comes in between 1,100 to 1,110. This is where a host of intermediate-to long-term moving averages are located. There is also strong chart support in the 1,080 and 1,100 area. We continue to believe that the Nasdaq is more susceptible to a full retest and therefore larger potential losses than its blue chip peers. The Nasdaq bottomed out in mid-August down at the 1,750 zone so we are looking for a correction back down towards this critical support level. In our view, many technology stocks remain very weak on a technical basis, both from an intermediate-term standpoint and from a longer-term standpoint. The Nasdaq also faces more technical impediments overhead, in our opinion, with more levels of chart and trendline resistance to deal with vs. the S&P 500 and the DJIA. The magnitude of the decline of many Nasdaq stocks since peaking in late June also suggests that a longer period of base building will likely be needed before a sustained advance can take shape. The Treasury bond market has caught many by surprise, rallying sharply last week and pushing the yield on the 10-year note back below 4% for the first time since early April. The 10-year Treasury has been in an intermediate-term advance since peaking out at the 4.9% area in May and June. As we have been saying, there is quite a bit of chart resistance in the 3.9% to 4.25% area so it will be interesting to see if Treasuries can push all the way through this zone. The next piece of resistance is down in the 3.7% area. This corresponds to the intermediate-term bottom in yields from back in March. Despite the surprising strength in the bond market, our long-term outlook remains the same. The Treasury market has been in a bull market since 1981 when yields were up at 15%. We think that the trend in yields has changed from lower to sideways, and we will eventually see higher yields down the road. In the meantime, a trend that has lasted over two decades will take time (possibly years) to reverse in our opinion. Required Disclosures As of June 30, 2004, SPIAS U.S. research analysts have recommended 35.9% of issuers with buy ratings, 52.7% with hold ratings and 11.4% 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 was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). The research and analytical services performed by SPIAS are conducted separately from any other analytical activity of Standard & Poor's. No research analyst that prepares a research report on a subject company has a financial interest in or is associated with that subject company. SPIAS is affiliated with other entities, which may receive compensation for performing services for companies covered by Standard & Poor's Equity Research Services. 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.
BW MALL
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