The Market Fails Again

The S&P 500 could not crack a key resistance level last week -- and that could set the stage for more downside risk

By Mark Arbeter

Last week, for the fourth straight time, the S&P 500 failed to break through heavy resistance between the 1170 to 1180 area. This latest failure leaves the door open to some more downside risk over the near-term as the market continues to disappoint.

The latest attempt to crack through overhead supply occurred on light volume and therefore was doomed from the start. As we have pointed out recently, there is heavy supply between 1144 and 1174, created by the heavy volume up day on Dec. 5, 2001. Further resistance in this area comes from the sideways consolidation this past summer. So, until the 1180 area is cleared on decent volume, the market is likely to continue its sideways trek.

The S&P 500 is likely to find some chart support in the 1125 to 1154 zone. A 50% retracement of the recent rally gives us a target of 1124. If this level is taken out, a retest of very good chart support in the 1080 is a good probability. At this point, that is a worst case scenario. Near term resistance is of course 1170 to 1180. The problem for the "500" if it does break out above 1180 is that there is another area of heavy resistance that runs from 1180 all the way up to 1300. This stacked resistance is likely to create a real problem for the market over the intermediate-term so a longer period of boring, sideways action is probably in store.

Volume measures on both the Nasdaq and the NYSE remain in bearish configurations. The advance-decline line of both the up-down volume on the Nasdaq and the NYSE remains below important moving averages. The 6-day summation of the up/down volume on the Nasdaq turned negative Monday and the 10-day should turn bearish shortly. Overall volume on both indexes over the last two weeks has been anemic, reflecting a real lack of confidence by investors, as well as huge uncertainty in the future direction of the market and the economy.

Sentiment is neutral overall, but some of the investment polls are tilted too far towards the bullish side. The Investors Intelligence poll of newsletter writers is showing 52.1% bulls and only 28.7% bears. These are numbers usually seen towards a market top, not a bottom. The American Association of Individual Investors poll, which is very volatile week-to-week, is 56.5% bulls and only 14.5% bears. This is the lowest percentage of bears since the market peak in early December. Other market polls and option ratios are currently neutral.

Action should slow even more over the next couple of weeks because of the upcoming holidays. Short-term, prices are likely to drift lower, but we see nothing major at this point. Over the intermediate-term, the market is likely to continue its directionless drift.

Arbeter is chief technical analyst for Standard & Poor's

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