By Mark Arbeter
As if on cue, the S&P 500 index pulled right back to its breakout point of 1,011 on Sept. 10 and early the following session, and looks to be headed to new recovery highs. A pullback after a breakout is quite common and tends to shake out weak holders, allowing the market to stretch its legs a bit.
An extension of the current rally since the bottom in March should take the S&P 500 up to the 1,050 to 1,075 area. Chart resistance begins at the 1,050 level and starts to get very thick at 1,075. A zone of heavy chart resistance runs from 1,075 to 1,175. The reason this area is significant is that the "500" traded within this range for a big part of 2001 and 2002, and therefore a lot of buying was done here.
Those that bought in that area, hoping that the worst of the bear market was over, become potential supply or sellers as the "500" moves into this area. A measured move, based on the width of the price consolidation the "500" traded in from early June until late August, would target the 1,070 level.
Other areas of potential resistance are based on common price retracements. A 38.2% retracement of the decline from the closing high in March, 2000, to the closing low October, 2002, targets the 1,063 level and a 50% retracement lies at 1,152. When support or resistance levels occur in greater numbers in the same area, the more significant they become.
Chart support for the index from a short-term basis is at 1,011 or the recent breakout point. A decent floor of chart support lies in the 960 to 1,010 area, derived from the recent consolidation.
The Nasdaq witnessed a sharp, two-day decline of over 3% during last week, but remains in a strong uptrend. The drop was a major positive for the index, as it alleviated an extremely overbought condition. The six-day relative strength index or RSI moved to 93.5 on Sept. 4, the highest and most overbought the index has gotten on a short-term basis since early January, 2000.
Short-term chart resistance for the Nasdaq is at the recent closing high of 1,889. Longer-term chart resistance exists between 1,750 and 2,300, with the thickest part of that overhead supply starting at 1,950.
The first Fibonacci retracement zone that the Nasdaq will run into, from the low in October, 2002, to the peak in March, 2000, would be a 23.6% retracement, and that would target the 2043 level.
There have been a few days of distribution recently, when the market declines on an increase in volume. An accumulation of distribution days during a one-to two-week period can signal trouble, so it is important that the market make a stand in the near-term. We believe some of the selling was in reaction to the September 11 anniversary and increased fears about terrorism.
We believe these fears will be short-lived and the market will regroup and head higher. Certainly some of the selling was profit-taking, in reaction to the overbought levels seen, especially on the Nasdaq.
Arbeter is chief technical analyst for Standard & Poor's