The S&P 500 fell back to trendline support in the low 970 area and bounced nicely until giving back some gains on Thursday. There is also chart support in this zone. Support below this zone comes from the 50-day exponential moving average, which lies at 958. There is stronger chart support in the 950 area, and we would not be concerned unless this level was taken out. On the upside, short-term chart resistance lies up in the 1010 to 1015 area with trendline resistance at 1050. Intermediate-term chart resistance begins at 1050 and gets heavy up above 1070.
Volume continued to act well, falling off on lower prices, and rising on advancing days. Our accumulation/distribution models have deteriorated over the last couple of weeks as the market has weakened, but distribution has not increased enough to turn our models bearish.
There have been big pullbacks in some of the leading stocks and industries during the latest pause in the rally, but important uptrends have yet to be broken. For instance, the AMEX Biotech index has recently fallen 13%, after running up 57% from the March low. As mentioned a couple of weeks ago, the biotech index had moved up to an important piece of trendline resistance up at the 500 area, and was certainly due for some corrective activity. A continued breakdown in the stocks that have been leading the latest rally would be a big negative and suggest that a correction is not far behind for the overall market.
Sentiment remains worrisome, and we believe this keeps a lid on the market over the intermediate-term. Investors Intelligence showed a drop in bullishness but the numbers are still tilted heavily towards the bulls. Bulls fell to 53.1% from 59.4% while bearish sentiment rose to 20.9% from 17.7%. A poll that tends to have more violent moves, the American Association of Individual Investors, has once again moved to an extreme level of bullishness. Bullish sentiment rose 71.4%, the highest since January, 2000, and bearish sentiment fell to only 8.6%, the lowest since November, 2000.
The bond market continues to get clobbered after the 10-year Treasury moved to multi-decade lows down near 3%. The 10-year yield is now back up above 3.6%, moving to its highest yield since mid-May. There is a wide area of chart support for the 10-year that runs from 3.55% all the way up to 4.25%. Trendline support comes in at 3.7% with more important trendline support at 3.9%. We still believe that weakness in Treasuries is a good sign for the stock market because it signals that investors think that the economy is getting stronger. Arbeter is chief technical analyst for Standard & Poor's