Markets & Finance

A Brighter Picture -- for Now


By Mark Arbeter The major indexes held at important support levels early last week, in what appears to be a successful test of the February lows. While there has been little to suggest a major rally is about to ensue, the market could begin a slow advance back to the top of its sideways consolidation.

The S&P 500 bounced off support in the 1080 to 1100 area and in the process, broke above a downward sloping channel that has contained the price action since the middle of March. The rebound sets the index up for a double bottom reversal formation, however, that would not be confirmed until the middle high of the formation (1174) is taken out. At this point, we doubt that will happen and still believe the index will continue to trade in the 1080 to 1180 range for the intermediate-term.

The Nasdaq rebounded after testing support in the 1700 zone and also broke above a bearish sloping trendline that has held prices since mid-March. For the Nasdaq to complete its double bottom reversal formation, the middle high at 1946 would have to be broken. The index is likely to continue its sideways trek between the high-1600s and mid-1900s.

The initial rebound off the lows contained some positives and negatives. The first obvious positive was where it occurred, right near important support. Secondly, the price gain was strong and the up/down volume on both the NYSE and the Nasdaq was very strong. Strong up/down volume is a critical component of any initial thrust higher. The negatives were that the overall volume was barely above average and this suggests that a major move higher is probably not upon us.

Secondly, the best Nasdaq performers during the advance, which was on Tuesday, were primarily severely beaten down telecom and technology stocks. These issues are not likely to provide market leadership because of their poor technical condition. Furthermore, strength in these beaten down, single digit stocks suggest that at least part of the rally was short covering and not institutions coming off the sidelines taking new positions.

Sentiment remains mixed, with short-term investment polls approaching bullish levels and put/call ratios already registering bullish readings while longer term investment polls are bearish. The Consensus poll is showing 31% bulls, needing to fall to 20% for a buy signal. The MarketVane poll is 33% bulls, nearing a bullish reading of 25%. The 10-day CBOE put/call ratio recently hit 0.86 and the 30-day put/call ratio has risen to 0.79. Both levels are considered bullish and have proceeded many market rallies.

However, Investors Intelligence is showing that newsletter writers are becoming even more bullish despite the sloppy action of the market. The II poll is firmly slanted towards the bullish camp (bearish from a contrarian view) with 54.8% bulls and only 28.4% bears.

Overall, sentiment is suggesting that the market could move higher in the near-term, but that the intermediate-term action will most likely be limited to a continuation of the sideways pattern that has prevailed since December. Arbeter is chief technical analyst for Standard & Poor's


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