By Mark Arbeter The market showed some signs of life last week, with the Nasdaq taking out an important piece of
resistance and trading volume on both the Nasdaq and the NYSE returning to more normal levels. The S&P 500 is inching ever closer to the top of its 5-month trading range, setting up the possibility of a summer breakout to a new recovery high.
It was the Nasdaq's turn this past week to break above the downward sloping
trendline drawn off the peaks from January, April, and early June. The S&P 500 broke above a similar trendline back in early June. Any breakout above resistance is something to take note of but the latest break by the Nasdaq occurred on a nice increase in volume. This factor makes the breakout much more significant and signals that institutions are finally moving back into stocks.
The next important pieces of chart resistance for the Nasdaq are at 2,050 and 2,080, or the two highs from April. The Nasdaq has a little more work to do than the S&P 500 to break out as the top of its trading range is up at 2,154.
The S&P 500 is getting close to challenging 1,150 or the high from early April. Above this resistance level, only the 1,160 area remains or the highs from back in February and March. The five-month trading range of 1,080 to 1,160 is still intact, but with any kind of move by institutions, recovery highs by the "500" could be seen shortly.
Volume finally picked up this week, an essential ingredient for any long lasting rally. While absolute volume levels on both the Nasdaq and NYSE were not overwhelming, any pickup from the dreadful levels seen during much of May and June is a positive. Since early May, the 20-day average of volume on the Nasdaq has declined from over 1.9 billion shares per day to a little less than 1.5 billion shares, the lowest since last August. The 20-day average of volume on the NYSE has contracted from about 1.6 billion shares in mid-May to about 1.27 billion shares per day.
Market internal measurements have improved nicely since bottoming out in May, and suggest that there is some underlying strength to the market's latest rally. With some market internals, as we mentioned in some past commentaries, there was a complete washout in May. NYSE new highs vs. new lows moved to levels seen during the first low of the bear market back in July, 2002. There has been a nice improvement in the number of highs vs. lows and that can be seen by the action of the 20-day and 75-day exponential
moving averages of NYSE highs minus lows. The 20-day average just broke above the 75-day average for the first time since last October. This indicator had been on a sell signal since early February.
Another measure of internal strength on the NYSE comes from an evaluation of market breadth. First, the NYSE advance/decline line has recouped most of its losses and is back up near the highs seen in early April. Secondly, the 30-day moving average of the advance/decline ratio recently hit 1.65 or the highest since last June. This moving average of market breadth had also declined to below 1.00 in May, or the lowest level since July, 2002. Oversold readings below 1.00 that are followed by quick moves to overbought readings above 1.4 are usually followed by pretty good market action, assuming a bull market is in place.
We mentioned last week that a potential positive for the stock market over the near-to intermediate-term is the action in the bond and commodity markets. The Treasury bond market has moved in a bearish fashion since yields bottomed out in mid-March, and have been a negative weight on stocks. The yield on the 10-year Treasury note continues to trace out a potential, bullish
double top. A break below 4.59% on a closing basis would complete this formation and would then target the 4.3% to 4.4% area.
On the other hand, the Commodity Research Bureau (CRB) index is looking toppy and may be in the process of breaking to the downside. At the very least, the CRB index has lost its upside momentum. If this picture were to develop, equity markets would get a much-needed shot in the arm. Arbeter, a chartered market technician, is chief technical analyst for Standard & Poor's