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Sounding the Depths

By Mark D. Arbeter While the Nasdaq continues to trade in a well-defined downtrend and the S&P 500 clings to support in the 1080 area, there are some indications the market is nearing a bottom. The major indexes have retraced about 50% of their rallies since September and moved into good areas of chart support. The indexes are fairly oversold, and some sentiment indicators have moved to levels not witnessed since the lows in September.

The Nasdaq has traded in a narrow, bearish channel since posting an intraday high on Jan. 9. On Feb. 22, the index moved down to the lower boundaries of the downward sloping channel (short-term support) in the 1700 area. It remains in a good zone of support between 1628 and 1776, and has retraced a little over 50% of its move from September to January.

The S&P 500 continues to hold around the 1080 area like a magnet, an important level because that was the low during the downtrend in Spring, 2001. The "500" is also in an area of good chart support that lies between 1054 and 1111. A 50% retracement (potential support) for the index comes in at 1060. While still early to call, both indexes could be tracing out very wide, head-and-shoulder reversal patterns. This formation would not be confirmed, however, until the averages break above their respective necklines which are well above current prices.

Both the major indexes have moved into fairly oversold conditions that have led to decent rallies in the past. Because the correction off the January highs has not been dramatic, we have not moved to extreme oversold levels seen at capitulation-type bottoms. For this to occur, the market would have to cascade back down to the the September lows. We continue to believe that the lows in September will not be retested. The 14-day Relative Strength Index on the S&P 500 has moved to a fairly oversold condition with the 6-day RSI on Nasdaq doing the same. The Demand Index for the Nasdaq, which is an indicator that combines price and volume, has also moved to an oversold position usually seen at or near market lows. The Demand Index typically oscillates between -40 and +40 for the Nasdaq, and is currently down near -31.

Sentiment continues to deteriorate as more investors switch from the bullish camp to the bearish camp. This is essential for most major market lows. There have been three daily CBOE put/call ratio readings of 1.00 or above and two others above 0.98. The 10-day exponential CBOE p/c ratio recently hit 0.89, the highest level since September. The 30-day CBOE p/c ratio hit its highest level since the beginning of October, rising to 0.82 on Feb. 21.

Some of the shorter term sentiment polls have moved to levels not seen since either the lows last Spring or since the lows in September. The Consensus poll is showing only 23% bulls, down from 62% bulls in early January, and the lowest since last Spring. MarketVane has moved to 36% bulls recently, the lowest level since October. However, a longer term sentiment poll of newsletter writers, Investors Intelligence, remains tilted towards the bullish side with 47.9% bulls and only 29.2% bears. At previous market lows, bearish sentiment usually equals or exceeds bullish sentiment, so this poll is still way too bullish.

The market may be nearing a low but it always pays to be late at a market bottom. While indications are mounting of a near-term bottom, we will wait until there is clear evidence that institutions are getting involved in the market again, and that will be seen in the volume measures. Arbeter is chief technical analyst for Standard & Poor's

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