By Mark Arbeter
The major stock market indexes all broke out to new recovery highs last week before succumbing to some profit taking. Both the S&P 500 and the Nasdaq composite indexes have moved into areas of increasing chart resistance so the intermediate-term action from here is likely to be a staggered affair.
From a very short-term perspective, the S&P 500 pulled back to a minor breakout area on Friday of 1,030 to 1,040. This is the most immediate support level for the "500" with the 10-day exponential moving average at 1,040. The 20-day exponential moving average is at 1,032 and also represents short-term support.
Looking out to the intermediate term, the S&P 500 has many areas of support underneath current prices with a good floor likely to limit any downside. Chart support for the index comes in at 1,010, 990 and then the critical level of 960. Remember, the consolidation zone or base that was traced out over the summer outlines two of these support levels of 960 and 1,010. The 50-day exponential moving average comes in at 1,017, and is usually an excellent area of support during an uptrend. Trendline support, drawn off the lows in August and September, comes in at about 1,005. The 150-day exponential moving average lies at 979 and the 200-day exponential average is at 971.
On the upside, minor chart resistance comes from the recent closing high of 1,050 and the intraday high of 1,054. As we have talked about many times in the past, the S&P 500 faces a great deal of overhead supply from price action back in 2001 and 2002, with the beginning of this resistance starting at 1,050. The bulk of that chart resistance lies up at 1,075 and extends all the way up to 1,175. Because of the extensive support below and heavy supply above, we continue to believe the "500" will trade in a range between 1,000 and 1,075 until at least the end of the year.
The Nasdaq remains in a stronger technical condition than the S&P and could certainly see an extension to the current rally. But, like the S&P 500, the Nasdaq has plenty of resistance above current prices and numerous levels of support below. Immediate chart support lies at the recent closing high of 1,950 and the intraday high of 1,967. Minor trendline resistance comes in up at 2,030. Major chart resistance is thick and runs from 1,950 to 2,300 and is from price action from back in 2001 and 2002. The first important Fibonacci retracement level comes in at 2,070 and that represents a 23.6% recovery of the bear market. A point of interest and a potential psychological resistance would be a 100% increase from the October low and that would target the 2,228 level.
Short-term chart support for the Nasdaq lies at 1,910 with trendline support coming in at 1,867. The 50-day exponential moving average is at 1,833 with another area of chart support just below there at 1,787. On a more intermediate-term basis, there is an area of chart support between 1,600 and 1,685. The 200-day exponential moving average is at 1,648.
Market internals suggest an extension of the current rally, however, as we said last week, a pause is certainly a good probability. While the breadth statistics we monitor (advance/decline lines and up-down volume statistics) all moved to new recovery highs, some of these have moved into very overbought conditions.
One that implies a pause to the current uptrend is the 10-day moving average of down/up volume on the Nasdaq. This measure has moved down near 0.50 once again, and this represents an extremely overbought level for this indicator. It is basically saying that the majority of volume going into the Nasdaq of late has been to the upside, and has historically been a precursor to short-term weakness. The last couple of times this has occurred, the Nasdaq's trend flattened out for about three weeks.
Taking a step back while analyzing the 10-day moving average of declining/advancing volume on the Nasdaq gives us some cause for concern for the intermediate term. As the Nasdaq has moved higher since March, there have been a series of small pullbacks, which is very normal during an advance. However, each consecutive pullback has been on an increase in down volume versus up volume. During the May retreat, the 10-day down/up volume hit 1.9, in July it rose to 2.3, and during the end of September, it hit 2.8, or the highest level since December. This increase in selling during the advance since March is a bit worrisome and this pattern has led to decent corrections over the last eight years.
Market sentiment on the investment polls continues to exhibit very high levels of bullishness. Investor's Intelligence bullish sentiment rose to 57.4% in the latest week while bearish sentiment fell to 19.8%. The II poll of newsletter writers has been heavily tilted toward the bullish camp for months. For the last 24 weeks, bullish sentiment has been above 50% and bearish sentiment has been below 25%. The last time bullish sentiment on the II poll was above 50% for that long was between November, 1999 and April, 2000, when it also happened for 24 straight weeks.
Believe it or not, bearish sentiment was higher during that period then it is now. There is no comparable time when bearish sentiment was this low for this long and we have data going back to September, 1987. The MarketVane poll, which is a shorter-term measure of market sentiment, rose to 58% bullish, which is the highest level since January, 2000.
A pause in the markets' advance is certainly possible in the near-term. The intermediate-term picture continues to look positive and there is not enough evidence to suggest that the current advance has run out of gas.
Arbeter is chief technical analyst for Standard & Poor's