Many short-term market lows during the last month of the year come out of the blue, with very little explanation for the weakness. However, there are plenty of reasons for weakness this year. First and foremost, the S&P 500 advanced right up to the bottom of major resistance in the 1170 area (recent high was 1170.35 on Dec. 5). The first time a stock or index runs into an area of heavy supply, the advance usually stops in its tracks and backs up for another run.
This is exactly what the Nasdaq did during mid-to-late November. The index rose to initial resistance in the 1920 zone and paused before breaking through this important resistance level. From a chart perspective, the Nasdaq is a little ahead of the "500", having already busted through the lower edge of supply created by the sideways trading action this summer. The supply zone for the "500" runs all the way up to 2328 with the top of resistance on the Nasdaq up at 1313.
The current pullback has taken the "500" back below short-term support of 1125, which marked the bottom of the most recent sideways consolidation. Further and more substantial support exists in the area of 1053 to 1105. While the failure of the S&P 500 to hold the early December breakout is somewhat disappointing, this type of pause has been the pattern since early October.
It is a little more negative this time because the breakout on Dec. 5 was a heavy volume day. In fact, it was the eighth heaviest trade day on the NYSE and the 10th largest on the Nasdaq. Falling below the day's range on a heavy-volume day sets up some hefty resistance when the market turns and heads into this range because there was a lot of accumulation that day.
However, as long as the "500" does not fall too far below the range on Dec. 5 (1144 to 1170), the resistance or potential supply should not be too much to overcome. But, if the "500" drops 10% or more below the bottom of that range, when the market rebounds into that range, investors that accumulated during Dec. 5 are likely to sell those positions in an attempt to cut their losses or break even, and thus create a ceiling for the market.
The Nasdaq is in a little better shape technically than the S&P 500, testing the top of its recent trading range in the 1940 area. Near-term support provided by the most recent sideways consolidation runs down to 1854. The 50-day exponential moving average, which many times provides support for the Nasdaq during an advance, comes in at 1866. There is additional chart support for the Nasdaq that begins at 1775.
After a large upward move, the market at some point will usually retrace a portion of the advance. As prices decline, they will often find support at Fibonacci retracement levels of 23.6%, 38.2%, or 50%. Potential Nasdaq support levels using these three retracements come in at 1906, 1806 and 1726, respectively. For the S&P 500, similar retracements and possible support are at the 1120, 1086, and 1059 levels.
Market sentiment is a real mixed bag with some measures firmly on the bullish side and others showing a good bit of fear. Investors Intelligence poll of newsletter writers is weighted towards the bullish side, with 43.4% bulls and 28.3% bears. The low percentage of bears is worrisome, as the market usually has trouble when bears drop below 30%. Bearish sentiment had fallen all the way to 23.7% recently, the lowest level since July.
With the latest market weakness, we would like to see the percentage of bears continue to climb and move back above 30%. The positive aspect of this poll is that the percentage of bulls remains mildly low, given the size of the rally off the September low.
We would become concerned if bullish sentiment were to rise above 55% as it did early this year. CBOE Put/Call ratios have risen of late, reflecting some fear and pessimism towards the equity market. This is exactly what you want to see during a pullback as option players protect themselves from further downside action. The 10-day CBOE p/c ratio has rebounded to 0.75, the highest level since mid-October with a one-day reading on 12/12 at a fairly high 0.91.
We believe that a short-term low is near and that the market will rebound into the end of the year with strength extending into 2002. As it has in the past, the Nasdaq will lead the major indexes higher. Arbeter is chief technical analyst for Standard & Poor's