Markets & Finance

A Slow Climb Higher


By Mark Arbeter There was more typical action this past week for the major stock market indexes as the intermediate-term advance continues. We see the current staggered advance remaining in force until early December, with the S&P 500 reaching up into the 1075 to 1100 before the normal mid-December pullback takes place. These mid-month retracements are usually minor and many times are set-ups for a year-end rally.

The S&P 500 pulled back to an important, intermediate-term support on Tuesday at the 1042 level. This support was provided by the intermediate-term trendline drawn off the March and September lows and subsequently tested in October. Volume was light during the decline and characteristic of a market in a strong uptrend and one that should be able to extend to the upside. The small sell-off also alleviated a short-term, overbought condition for the index. Below the 1042 level, additional support lies at the 50-day exponential moving average that comes in at 1034.

Chart support from the recent print low in October is at 1018, with a large zone of chart support between 960 and 1015. The 150-day exponential moving average is at 995 while the 200-day lies at 984. A trendline drawn of the lows in May, August, and September comes in at 1030 and is an additional piece of support for the S&P 500.

Short-term or minor chart resistance for the "500" is located at the recent closing high of 1059 and the recent intra-day high of 1064. A 38.2% retracement of the bear market comes in at 1063.52 with a 50% retracement at the 1152.11 level. Once the index takes out the levels up near 1060, there is a thick zone of chart resistance that begins at 1075 and extends all the way up to the 1177 area. Because of the thickness of this resistance zone, the market is likely to continue its stair-step advance, with any kind of dramatic move higher very unlikely. A trendline drawn off the January 2003 and June 2003 highs lies just above the 1100 zone and is also considered tough resistance.

The Nasdaq's pullback that ended Tuesday also found support on its intermediate-term trendline drawn off the March, September, and October lows. This trendline on Tuesday was at 1925 and is now near the 1940 level. The index' 50-day exponential moving average, an excellent piece of support during an uptrend, lies at 1892. Near-term chart support is between 1924 and 1930 with additional chart support at 1865.

Short-term chart resistance comes in at the recent closing high of 1976 and the recent intra-day high of 1992. Psychological resistance lies at 2000 or the first big round number the index has to face in many years. A wide zone of chart resistance lies between 1950 and 2300 and will probably limit the slope of the advance from here. A 23.6% Fibonacci retracement of the Nasdaq's bear market and potential resistance is at 2070. Trendline resistance drawn off the July and September highs lies at 2080.

Market internals remain fairly strong with new highs recently seen in both the NYSE and Nasdaq advance/decline lines. Accumulation/distribution models continue to track in bullish territory with strong readings seen on Wednesday. There was a volume breadth thrust on the 12th with up/down volume hitting 8.5 to 1 and on the NYSE, a reading of 5.3 to 1 was seen. The Nasdaq's ratio was the highest since late May.

Market sentiment, for the most part, remains extremely bullish and may limit the advance from here. The latest data from Investor's Intelligence is showing 57.3% bulls and 20.4%. The II poll has seen at least 50% bulls and less than 25% bears for the last 28 weeks, the longest consecutive overbought readings since at least 1987.

Because we are coming out of a major bear market, and that money on the sidelines remains high, high levels of bullishness has not been enough to cause a top in the market like we have seen in the past. What will be needed for a correction at this point will be a concerted move by investment advisors away from the bullish camp and back to the bearish side of the fence. Until that is seen, the market is likely to have a floor under it.

The one positive aspect about sentiment continues to be the action of put/call ratios on the CBOE. Each minor market pullback has been accompanied by a decent jump in put/call ratios, indicating fear of further losses and a willingness among investors to protect themselves from the downside. This action is bullish and as long as each pullback is met with skepticism (higher put/calls) about the sustainability of the rally, a large correction is probably not likely.

One worry for the stock market, and one that does not seem to be getting a lot of attention, is the action of other markets such as the U.S. dollar, the CRB Index, gold, and oil. The U.S. dollar continues to be in a bear market, which is inflationary for the U.S., negative for Treasury rates, and positive for commodity prices. The effects of the dollar on the stock market are not always clearcut, but can certainly be a negative if the currency heads south in a big way.

The CRB Index just broke out again and is at the highest level since 1996. Gold approached the $400 per ounce level Friday while crude oil is back above $32 per barrel. If these trends continue, inflationary worries will spread quickly, something investors are certainly not used to, and could certainly put some pressure on U.S. equities. Arbeter is chief technical analyst for Standard & Poor's


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