Markets & Finance

A Breather for the Bull


By Mark Arbeter The stock market paused last week to catch its breath as we reached some fairly overbought conditions with respect to price and volume data. In addition, the major indexes ran into some important areas of chart

resistance, which many times can slow even the strongest of rallies.

The Nasdaq has been on a tear since bottoming in late October and analyzing price rate-of-change (ROC) data reflects this. The 15-day ROC (ending Nov. 15) on the Nasdaq hit a very overbought level of 9.4%, the highest reading after a pullback or correction since August, 2003.

As we stated with the S&P 500 in our last column, overbought technical readings at the beginning of a rally have been positive for the market on a historical basis. The danger with overbought readings, in our view, is when they come after an extended (intermediate-term) advance or when they occur during a bear market.

A second method for measuring how overbought an index is on a short-term basis is by looking at the relative strength index or RSI. The 14-day RSI for the Nasdaq rose to 78 on Nov. 15, while the 6-day RSI hit almost 90. This is the highest level for the 14-day RSI since last September and the highest for the 6-day RSI since last August.

In this case, like the above example, we are just looking at RSI levels following a pullback or correction. Using weekly data, the 14-week RSI recently hit a peak of 65. The 14-week RSI has moved to at least 75 during extended rallies, so in our opinion, the current advance still has some upside before moving to extreme overbought levels on a weekly basis.

When looking at volume data, we also see that the market is overbought or extended on a short-term basis. There has been a disproportionate amount of advancing volume vs. declining volume of late, and this data is signaling that there could be a pause in the latest advance. The 10-day

moving average of declining volume divided by advancing volume on the Nasdaq has once again approached zero, an area that has preceded many market pauses and corrections.

The 10-day D/A volume on the Nasdaq fell to 0.62 recently, the lowest level since the beginning of June. Looking at the intermediate-term, the 37-day moving average (smoothed) of D/A volume on the Nasdaq has dropped to around 1.25, the lowest since back in January of this year.

The S&P 500 ran into chart resistance above the 1,180 level last week, and this coincided with the other major indexes running into respective areas of chart resistance. The "500" had a strong rally back in the spring of 2001 with a big volume day occurring between 1,192 and 1,238. Big volume days that occur on the upside represent very difficult chart resistance as a lot of accumulation occurred between these price levels. The S&P 500 eventually fell below this area later in 2001 and tried to bust above it four times in late 2001-early 2002 and failed.

Strong

support for the S&P 500, which we believe will act like a floor for the index in the near-term, lies down at 1,160.

The Nasdaq hit a brick wall up near the 2,100 level, also an area of heavy accumulation during the peak of the index in January of this year. The last piece of chart resistance for the Nasdaq before it can officially put the correction of 2004 behind it runs from 2,100 to 2,153. We believe it is only a matter of time before the index can surpass January's peak, on its way to a potential run up to the mid-2,500 zone. Good near-term support for the Nasdaq is in the 2,030 to 2,050 area.

Crude oil futures reversed course Friday, Nov. 19, after a very healthy pullback. Crude oil, after surging to $55 a barrel at the end of October, fell to near the $45 level last week. Prices retraced about 50% of the advance since the lows in June and also fell into an area of chart support between the low-to mid-40s. The 200-day exponential moving average lies at $43 and represents longer-term support. The long-term trend remains bullish for oil despite the big rise this year and we believe a renewed rally could cause some hesitation among equity investors.

The Dollar Index continued lower last week while gold futures moved to new bull market highs. The Dollar Index fell to almost 83, the lowest level since October, 1995. The next piece of important chart support lies down near 80, which was the low from back in 1995. Gold finished at a 16-year high, benefiting from the weakness in the dollar as futures closed just shy of the $450 level. Trendline resistance for gold lies up in the $475 to $480 area.

Required Disclosures

5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.

As of September 30, 2004, SPIAS and their U.S. research analysts have recommended 29.2% of issuers with buy recommendations, 58.5% with hold recommendations and 12.3% with sell recommendations.

All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request to Standard & Poor's, 55 Water Street, New York, NY 10041.

Other Disclosures

This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS.

Disclaimers

This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

Readers should note that opinions derived from technical analysis may differ from those of our fundamental recommendations. Arbeter, a chartered market technician, is chief technical analyst for Standard & Poor's


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