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A Holding Pattern for Stocks

By Mark Arbeter The S&P 500 remains trapped in a trading range that is almost five months old and last week continued the pattern of lethargic trading. The benchmark index has been confined to the 1,080 to 1,160 area, and is currently testing the upper half of this range. Shorter-term, the index tested both chart

support and trendline support in the 1,125 area earlier in the week and held. Near-term

resistance for the S&P 500 is at 1,142 or the most recent closing high. Above that point, chart resistance runs all the way up to the 1,160 area or the highs that were posted back in January, February, and March.

The Nasdaq has been oscillating around the 2,000 level for the past couple of weeks. The index ran into trendline resistance last week at 2,020 and has been unable to garner enough strength to push above this near-term obstacle. The trendline is drawn off the January and April peaks and is currently at 2,010. While the index has broken back above its 50-day and 200-day

moving averages, it continues to trace out a series of lower highs and lower lows. Immediate chart resistance lies in the 2,050 to 2,080 area, or the highs posted during the month of April. Near-term chart support comes in at 1,990 with very important chart support, from the lows in March and May, down in the 1,900 zone.

The problem with the stock market right now is the lack of volume. There is not enough trading by institutions to push the indexes either way. Over the last 24 trading days, volume on the NYSE has been below its 50-day moving average for 22 of those days. Volume woes have been the same story on the Nasdaq with only 3 out of the last 31 trade days seeing above-average volume. This volume pattern is more typical of August than May and June.

Momentum measures on both the S&P 500 and the Nasdaq remain mixed, reflective of the latest price action. Daily and monthly momentum indicators are positive while weekly momentum is bearish. Most major market moves occur when all three time periods are aligned together. Also, neither index is overbought or oversold when looking at short, intermediate and long-term indicators.

Sentiment indicators have been all over the place lately, giving contradictory signals. The options market has shown a good deal of fear lately while investment polls are exhibiting high levels of bullish sentiment. The 10-day and 30-day CBOE put/call ratios moved to extreme levels recently, typical of a market bottom. The 30-day CBOE p/c ratio hit 0.98 on June 14, the highest reading since December, 1994. The 10-day ratio also got to an extreme, and is quickly backing off. This move lower, from extreme high levels, is usually bullish for the market as bearish bets are closed and many take bullish positions. On the equity-only side, the 30-day recently rose to the highest level since the market bottom in October, 2002.

Clashing with these high put/call readings is a return to the bullish camp by many newsletter writers. The latest readings from Investor's Intelligence poll of newsletters shows bullish sentiment at 55.7%, the highest since March, and bearish sentiment at only 17.5%, the lowest since February. The two-week percentage point change in bullish sentiment has been 10.6, the largest switch to the bullish side since last May, which actually turned out to be a good time to buy. We are uncomfortable with the absolute readings of this poll, but it has not produced good results for timing the market at peaks.

One potential positive for the stock market over the near- to intermediate-term is the action in the bond and commodity markets. The yield on the 10-year Treasury note is tracing 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. Conversely, the CRB Index is looking very toppy and may be breaking down. If this scenario were to play out, it should give the equity market a much-needed shot in the arm. Longer-term, we still believe that the trend in interest rates will be higher, which should help the U.S. dollar and hurt commodity prices. Arbeter, a chartered market technician, is chief technical analyst for Standard & Poor's

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