By Mark Arbeter
The market is catching its breath after pretty impressive gains during most of January. We believe once this short-term consolidation phase runs its course, the market will move higher and extend the 2001 gains.
The Nasdaq, after failing to significantly bust through resistance at 2850, has turned lower in what will be an important market test. The trendline that the index busted through, drawn off the Sept. 1 high, now represents support in the 2650 area. Chart support for the Nasdaq comes in between 2500 and 2640, while a 50% retracement of the recent advance lies at 2575.
There is also a price gap between 2618 and 2683 that may be filled before we rise again. So, there is certainly a good deal of support below which should hold.
During January, the Nasdaq exhibited positive accumulation patterns on almost a daily basis. That is, price and volume moved together. When the index rose, volume accompanied that rise, and when prices fell, volume fell. Even though Feb. 2 was pretty ugly from a price and up/down volume standpoint, volume is so far very light, which is positive.
Many oscillators and momentum indicators based on the price action of the Nasdaq got to overbought or near overbought levels on a short-term basis and the current pause will take care of this. These indicators frequently reach overbought levels early in an intermediate-term advance so the recent strength was very important.
There has been improvement in the number of Nasdaq stocks hitting new 52-week highs and they recently registered 2.7% of issues traded. However, during most intermediate-term advances, new highs usually get into the 2.5% to 5% range and stay there. This has not happened as of yet. New lows on the Nasdaq are in very good shape, running well below 1% of issues traded.
It is very important for the Nasdaq to hold in one of the support levels given above, and not have this latest weakness feed on itself. This is a positive time of year for equities and there is plenty of fuel on the sidelines to support further gains. The most important piece though is the Federal Reserve. Policymakers have been very aggressive so far, and we feel have put a floor under the market. However, the Fed knows how sensitive the economy is to the stock market and consumer psychology, so if the Nasdaq proceeded to have another downward spiral, we think Greenspan & Co. will do all they can to support the market at this time.
Arbeter is chief technical analyst for Standard & Poor's