From Standard & Poor's Equity Research
The S&P 500 index and the Dow Jones industrial average broke out to new recovery highs last week while the Nasdaq composite index struggled with overhead resistance and continues to lag. Bonds rallied sharply, with yields testing their recent breakout point. Crude oil rallied back up to the recent highs in the $64 area before pulling back a bit on Friday, Mar. 17.
The S&P 500 broke out of a two-month consolidation to its highest level since May, 2001. The peak for the rally that ended in that month was 1315.93, and that represents long-term chart resistance. The index ran into trendline resistance at the end of the week at 1309. This trendline is drawn off the peaks in March, 2005 and January, 2006. An additional trendline, off the August, 2005, and January, 2006, highs, comes in at 1316. A third piece of trendline resistance drawn off the most recent peaks in November, 2005, and January, 2006, lies at 1332.
Fibonacci resistance, based on the width of the latest pullback, targets the 1320 level. The S&P 500 has also broken out of a bullish ascending triangle formation, in our view. The width of this pattern is 46 points, which when added to the breakout point of 1295, gives us a potential target of 1341.
The daily moving average convergence/divergence (MACD), a momentum indicator based on the price action of the S&P 500, has turned back up and is now sitting above its signal line. In addition, the daily MACD is above zero, another positive. The weekly MACD is also in a positive configuration after pulling back and testing its signal line before reversing higher. The weekly MACD has put in a series of lower highs and higher lows since the beginning of 2004. This weekly MACD pattern is similar to what we saw in late 1999 and 2000.
The 6-day relative strength index (RSI) has climbed above 75 for the first time since early January, and is in overbought territory. The 14-day RSI is at 64, and is not yet overbought. Weekly RSI readings are in between 60 and 70, and are in neutral territory.
The Nasdaq ran back up to trendline and chart resistance on Thursday, Mar. 16, and reversed, failing to break out to a new recovery high. The Nasdaq's recent pullback into the Mar. 9 low was more severe than the S&P 500 and the DJIA. Often, the Nasdaq will lead the main indexes on both the upside and the downside. Trendline resistance, drawn off the peaks in 2006, came in at 2324, right at the intra-day high on Thursday. Chart resistance sits between 2314 and 2333. In addition, trendline resistance off the January 2004 and January 2006 highs comes in at 2349, not far from the recent recovery high. For the Nasdaq, the peak back in May, 2001, is at 2328, also close to the Nasdaq's recent recovery high.
One of the areas of the market that has kept a lid on the Nasdaq of late is the semiconductor stocks. The Semiconductor HOLDRS (SMH), an ETF made up of 20 semiconductor stocks such as Intel (INTC), Texas Instruments (TXN), and Applied Materials (AMAT), has dropped 11.4% since its high of 40.20 on Jan. 11. This decline almost equals the 13% correction by the SMH into the October, 2005, low. The semi group is highly volatile but remains in an uptrend that started back in September, 2004. However, the semiconductor ETF has failed to exceed its recovery high from back in January, 2004. Money flow into the group has been negative since the beginning of December. The SMH is approaching important trendline and chart support in the 35 zone. We think that for the Nasdaq to once again lead the market to the upside, the semiconductor stocks will have to start acting a lot better.
Market sentiment continues to give off mixed signals, and therefore, in our view, is less predictive as a market input for technical analysis. On the plus side for the stock market, in our opinion, has been the major drop in bullishness on the Investor's Intelligence poll. Bullish sentiment has dropped from 60.4% in December to 42.3% last week, the lowest reading since August, 2004. Bearish sentiment has jumped from 20.8% to 33% during that same time period. This is the highest level of bearish sentiment since April, 2003. Both August, 2004, and April, 2003, were excellent times to get into the stock market. Meanwhile, other sentiment polls such as Consensus and MarketVane are still showing fairly elevated levels of bullishness, a negative in our view. The same thing can be seen in the options market, with some put/call ratios at bullish levels and some at bearish levels.
Last week saw a large pickup in volatility in the bond market with yields rising Monday, falling sharply on Tuesday, rising again on Wednesday, falling sharply on Thursday, and then rising again on Friday. The drop in yields last week, back to 4.65% on Thursday, looks like a test of the recent breakout area, in our view. Often, when a market breaks out, it will come back and test the breakout point before resuming its advance. Yields could fall all the way back to the 4.5% zone and test the bottom of the channel that has been in place since June, 2005, before the next leg of the intermediate-term advance begins. On a daily basis, momentum is positive (suggesting yields could move higher) and not yet overbought.
The next piece of chart support comes in at 4.9% from the highs back in the middle of 2004. If the 10-year were to run up to the top of the 9-month channel over the next couple of months, trendline support would come in around 4.95%.
Crude oil prices ran up to $63.90 on an intraday basis Thursday, Mar. 16, well above the closing level of $59.96 at the end of last week. However, crude oil ran into chart resistance, from the previous high back on Mar. 3, and fell Friday, finishing the week at $62.77. In addition to chart resistance at $64, this level also represents a Fibonacci retracement of 50% of the most recent decline during February. Often, key Fibonacci retracement levels represent tough areas for a market to get through. The daily MACD has moved above its signal line but is still below zero. Short-term trendline support sits at $60.50, with chart support in the $60 area. We still believe that crude prices will need to jump above resistance at $64 to confirm a new intermediate-term advance has started.
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