By Mark Arbeter
The market continues to flirt with danger, remaining very close to the price lows witnessed in July. The failure to rebound sharply after testing the recent lows does not inspire a lot of confidence, and neither does the lack of volume. While the countertrend rally that we talked about previously could have further to go, we continue to be very cautious toward equities.
While we hate to say the market must show some strength next week, as we do not like to paint ourselves into a corner, further weakness is likely to create a cascading effect as major support levels will be taken out. For instance, a drop below the 776-844 range on the S&P 500 would target a decline down to the 600 to 680 area -- and it may be a very quick move. Many times, once a stock or an index breaks major support, the stock or index will move very quickly to the next area of support.
For the "500" to complete its attempted double bottom reversal formation, the index would have to close above the 965. Until that happens, all rallies can be considered bear market in nature.
Despite our continued cautious stance towards the market, there have been a few positive technical developments of late. During the retest, there have been fewer new lows/issues traded on both the Nasdaq and the NYSE. While this by itself does not suggest that the lows will hold, it is certainly a prerequisite of a successful double bottom.
There have also been some positive divergences with respect to the Nasdaq. The index did undercut the July lows by 2%, but many technical indicators we monitor held above their respective lows. Also, this in itself does not guarantee that the lows will not be taken out, positive divergences frequently emerge during market bottoms.
Another positive relates to sentiment and put/call ratios. As mentioned last week, put/calls moved to extreme oversold levels recently, and while sometimes early, these have been pretty accurate at calling eventual turning points in the market. During the week of Sept. 20, there were five straight days of CBOE put/calls over 1.00. This is the first string of 5 readings over 1.00 since December, 1994. On Sept. 18, the total CBOE p/c ratio was 1.36, also the highest since 12/94. Also, there were four readings over 1.00 for the equity-only put/call, matching what occurred in September, 2001.
Unfortunately, internal market data and sentiment are secondary to the price and volume action of the market. The fact is that the market remains in the worst bear market since 1929-32 and there is little long-term technical evidence that the bear is done growling or is ready to hibernate.
Long-term chart patterns of many major stocks as well as countless small stocks remain horrible technical condition and in no state to begin an uninterrupted advance. So many major issues have either broken long-term topping formations and have moved to new bear market lows or are very close to breaking down from major topping patterns that it is downright scary.
In our estimation, the best scenario from here would be that the July lows hold and the market drifts sideways for the intermediate-term. At worst, the July lows will fold like a weak poker hand and the market will resume its torturous slide into the abyss.
Arbeter is chief technical analyst for Standard & Poor's