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A Pause In the Action

By Mark Arbeter The major indexes have run up to major areas of chart

resistance, -- and while some of them actually posted new recovery highs, they did not push far enough above resistance to officially call them major breakouts, in our opinion. It is quite common for indexes and individual stocks to pull back after reaching previous intermediate-term peaks, and we view the current action as a pause in the ongoing uptrend. We believe that once this near-term pause is over, the major indexes will continue higher over the next month or two.

The S&P 500 had one strong close above its recent high of 1225 from March, finishing at 1235.20 on Wednesday, July 20, before Thursday's selloff. For the blue chip indexes, we like to see at least a 1% close above or below a significant resistance or support level to quantify as a breakout. We also like to see two consecutive closes above the breakout point. This alleviates a lot of false moves to the upside and the downside, which can be a technician's nightmare. A pullback at or near significant resistance is quite common, and in our view, it represents a healthy pause in the rally.


support for the S&P 500 is at the breakout point of 1225. Additional chart support lies in the 1215 to 1220 area. The 50-day exponential

moving average lies at 1204, which also acts as support many times. Once this pullback ends, we believe the S&P 500 can move up into the 1250 to 1275 area before the intermediate-term rally is completed.

Trendline resistance, drawn off the peaks in 2004 and early 2005, comes in at 1260. The next piece of Fibonacci resistance, a 61.8% retracement of the bear market, would target the 1253 level. In addition, long-term chart resistance, from back in 1999 to 2001, begins in the 1260 zone.

The Nasdaq, after falling 271 points or, 12.5%, from Dec. 31, 2004 to April 28, 2005, has rebounded nicely and retraced the entire correction. The index ran right up to the top of its recent trading range before pulling back. On the first trading day of the year, the Nasdaq's intraday high was 2191.60. On Thursday, the Nasdaq pushed as high as 2193.19 before profit taking set in. Minor chart support exists in the 2150 zone with more significant chart support down at 2100. Initial resistance for the Nasdaq, once the 2190 level has been cleared is not too far away at 2210. This area represents trendline resistance off the highs in 2004. Above this level, long-term chart resistance lies in the 2250 to 2300 area, and is from back in 2001.

In addition to the positive look of the major indexes, other secondary indexes have broken out, and this, in our view, supports our belief that higher prices will be seen. The AMEX Biotech Index (BTK) has broken out of a massive base to its highest level since 2001. The Biotech Index had been trading in a volatile range for the last four years, so in our opinion, this breakout is significant. The index has now retraced more than 61.8% of the losses it suffered during the bear market from 2000 to 2002. The BTK is now 21% below its 2000 high, which is pretty impressive in our view, given that the index fell over 60% during the bear market.

The Philadelphia Semiconductor Index (SOX.X) also broke out recently, moving to its highest level since mid-2004. While this is impressive from an intermediate-term perspective, the index has much more work to do, in our view, to repair the damage suffered during the bear market. For instance, and in comparison to the biotech's, the SOX has only retraced about 23.6% of its bear market, and remains below the highs it posted in January 2004. In addition, the index is still 64% below its all-time peak from back in 2000. Because the SOX remains so far below its all-time high, it is faced with far more technical obstacles, such as chart and trendline resistance, than the biotech index. It is positive however, to see growth sectors of the market lead on the upside, as history has shown, the best market gains are led by growth stocks.

The bond market continues to grind lower as yields head higher. While it would probably take a pretty good move in yields, in our view, to put an end to the rally in stocks, it is a little unnerving that the recent correction in bonds is not getting a little more attention. In review, the 10-year yield on the Treasury note took out important trendline support in mid-June. This trendline is drawn off the March yield peak. This was the first sign of a potential reversal in yields. The 10-year yield then traced out a double bottom reversal pattern during June and July, confirming an intermediate-term trend change. The width of the double bottom formation was 40 basis points, adding this to the top of the formation, gives us a potential target of 4.6% over the next couple of months.

Major trendline resistance, drawn off the peak in yields in 2002, 2004 and 2005, also comes in around the 4.6% zone. In addition, chart support from the yield highs in March, lies in the 4.5% to 4.7% area. Another negative for bonds in our view is that sentiment remains very bullish towards bonds despite the latest reversal. For the last 9 weeks, bullish sentiment on the MarketVane poll has been at least 70%, the longest streak of favorable sentiment towards bonds since the multi-decade low in yields back in 2003. Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's

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