The intraday low of 1934.67 was taken out as the index has traced out a bearish descending triangle formation (a series of lower highs and flat bottoms). A downside break will be more negative with a close below the 1923 level, which is where the rally started after the surprise rate cut by the Federal Reserve on Apr. 18. The heavy volume day on Apr. 18 has represented excellent support, but a close below 1923 would shift that volume to heavy resistance, and would raise the possibility of a retest of the April lows of 1639.
The S&P 500 has so far held above its July intraday low (support) of 1165.54 and its low close on July 24 of 1171.65. However, the S&P 500 is below the range it traded on Apr. 18 or the heavy volume day so the index is below formidable resistance. The price range for Apr. 18 was 1191.81 to 1248.42 and that area has already halted the "500" in its tracks twice, once in July and once in August.
The recent intraday high for the "500" was set on Aug. 2 at 1226.27, right in this area of heavy resistance. Both the S&P 500 and the Nasdaq failed to complete small double bottom formations because they were unable to break above the intervening high by a decent margin. This failure has set the S&P 500 up for a small double top, and as we mentioned above, a descending triangle on the Nasdaq. The more important intermediate-term formation for both indexes is still a downward sloping channel that began in May.
As we have pointed out over the months, major bottoms after bear markets take time to develop. Looking at history, major market bottoms have taken between two and five months and typically take the shape of a double bottom. With the seasonals turning negative in September and October, this could set the market up for its secondary low in the fall months and therefore the bottom would be five to six months wide. This substantial base could then be a platform for outsized gains from November to January, the strongest three months of the year.
Sentiment continues to be complacent despite the recent slide. Investors Intelligence poll of newsletter writers is skewed way too much to the bullish side with 46.4% bulls and only 27.8% bears. At a major low, these numbers go to a 40%/40% split and sometimes have moved to a larger percentage of bears than bulls. Volatility indexes have failed to exhibit much fear, and remain at levels not associated with previous major market bottoms. The VIX (volatility index of S&P 100 measuring option premiums) is in the low 20s, but will usually jump to 40 or above at a major low. The VXN (volatility index of the NASDAQ 100) is in the 50 area and usually rises to the 75-90 level at a major low.
If the market does fall back to the lows seen in April, it will be very important that these sentiment indicators show much more fear and higher levels of bearishness. If they do, then the potential that the lows will hold would be high and that a good market rally could then begin.
One beneficiary of the weakness in stocks has been the treasury bond market. The 10-year note has traced out a bullish head-and-shoulders reversal pattern and appears headed toward the March yield low of 4.7%. Despite the jump in yields between March and May, which coincided the strength in the stock market, the 10-year remains in a bullish channel that has existed since January 2000. If the stock market bottoms during the Fall months, the Treasury market will most likely top out so we don't see yields falling too much further then the lows seen in March.
The market is trying to hold on but we continue to believe that the weight of tax-loss selling during the fall months will eventually send the indexes back down for a retest of the April lows. Arbeter is Chief Technical Analyst for Standard & Poor's