By Mark D. Arbeter
The major indexes continue to trace out lower highs and lower lows in the formation that is all too familiar to investors, a narrow descending channel. The difference between the current downtrend and the prior descending channels since the Nasdaq topped in March, 2000, is that we believe good, long-term chart support exists below and should provide a floor for the market.
However, major resistance lies overhead, and this will put a ceiling on equity prices, so the action is likely to remain choppy for the months ahead.
The rally early last week was anemic from a volume perspective, with daily volume readings well below the 50-day average. The inability of the market to register any kind of follow-through strength is quite common during these narrow bearish trends. Short covering lifts the market for a few days, but there is not enough money coming in off the sidelines -- in other words, investors do not have enough confidence in equities to step back in at this point.
Near-term support for the S&P 500 lies at the recent intraday low of 1078, and for the Nasdaq, at 1772. Another potential area of support for the indexes is derived from a 50% retracement of the gains from September to January and this would target 1054 for the "500" and 1743 for the Nasdaq. Chart support, from the sideways consolidation in October, comes in at 1054 to 1111 for the S&P 500 and 1628 to 1776 for the Nasdaq. These areas of support are likely to limit any near-term damage for the major indexes.
One clear positive, and an indication that the weakness in equities could be near an end, is the action in the options market. There have been very high readings of put/call ratios on the CBOE. The total CBOE p/c ratio has hit 1.00 or above twice recently, and has also seen two daily readings near 0.98. This high level of put buying vs. call buying is usually bullish and has preceded many market lows. The high daily readings have pushed the 10-day exponential p/c ratio to a bullish 0.86, the highest level since September. The 30-day p/c ratio is also in bullish territory at 0.79.
For the most part, sentiment polls continue their move from bullish estimates towards the market to bearish outlooks, which is positive. The MarketVane poll is showing 36% bulls, down from a recent high of 54%. The Consensus Poll is now 37% bulls, way below the recent high of 62% bulls. A further move for these short-term sentiment polls below 30% would sway these polls into bullish configurations. They both have fallen to below 20% bulls but that occurred during major damage to the market, which we do not see during the current downdraft.
The longer term Investors Intelligence poll of newsletter writers is still stubbornly leaning towards the bullish side, with 47% bulls and only 29.5% bears. The bullish number is down from a recent high of 52.6% and the bearish reading is up from a low of 22.7%.
The very important volume breadth measures on both the NYSE and the Nasdaq remain bearish. As was pointed out, there has been little follow-through strength of late and therefore, little hope that the market has finally turned the corner for an extended advance. Until there is a dramatic improvement in the up/down volume measures, any rally is likely to be followed by further distribution and at best sideways action.
With very substantial support below creating a floor for equities, and an abundance of supply overhead acting as a ceiling, the market is likely to continue its sideways, choppy action over the short-to-intermediate term. This is a great market for traders but a terrible one for long-term investors.
Arbeter is chief technical analyst for Standard & Poor's