Caution Signals for Stocks

The Dec. 3 reversal could be the first sign that the intermediate-term advance has run its course

By Mark Arbeter

While we do not subscribe to theory that big round numbers are that meaningful for the longer-term investor, they can be very influential for the short-term trader. The major indexes all broke out to new recovery highs on the first day of December. However, the inability of the market to follow through was caused by the brick wall the Nasdaq ran into at 2,000. The intraday high on Wednesday, Dec. 3, of 2,000.92 turned out to be the high for the week, and a reason for traders to take profits. The Nasdaq has been the leading major index since the low last October and is very influential on the rest of the market.

The Nasdaq's failure at 2,000 was not the only reason the market was unable to push higher. Both the S&P 500 and the Nasdaq have advanced up into or near major areas of chart resistance. The intraday high during the week for the S&P 500 was 1,074.30, right at the beginning of a thick zone of resistance that runs from 1,075 all the way up to 1,177. In addition to this, there is trendline resistance at 1,080 and 1,110. For the Nasdaq, major chart resistance runs from 1,950 to 2,300. Trendline resistance lies at 2,070 and a 23.6% retracement of the bear market losses also comes in at 2,070.

Another reason for the pullback this week is the recent pattern of the major indexes to correct almost immediately after they break out to new recovery highs. While this action can frustrate the bulls to a degree, as long as important support levels are not breached during the pullbacks, and there is not a pattern of heavy volume sell-offs, the market is likely to grind higher.

Up until Wednesday, Dec. 3, there was little evidence from a price and volume standpoint that a decline of some size was imminent, other than the overhead chart resistance we have talked about of late. While overhead resistance exists, it is not a reason to get bearish, just a reason to expect that there will be a pause in the advance. The reversal Wednesday, especially on the Nasdaq, while only one day, could be the beginning or first sign that the intermediate-term advance has run its course.

Volume, which has been very supportive of the advance, was very heavy on Wednesday during the decline; in fact it was the heaviest since Sept. 3 on the Nasdaq. NYSE volume was slightly above average and not as negative as the action on the Nasdaq.

Along with the evidence of some distribution last week -- for the first time in a while -- there were some disturbing signs from some of the stocks that had been leading the advance. A few stock groups that have been in a leadership position got absolutely hammered last week, a big negative if it continues. Leaders in the airline, online education, semiconductor, and retailing segments got hit hard with some stocks undercutting their 50-day moving averages. A breakdown in the leaders is a clear sign of an impending decline and will have to be monitored closely in the weeks ahead.

As we have mentioned quite often of late, there is a lot of strong technical support for both the S&P 500 and the Nasdaq just underneath current levels. For the "500", the important 50-day exponential moving average lies at 1,043. Trendline support, drawn off the lows in May, August, Sept. and Nov. lows also lies in the 1,043 area. The more times a trendline is tested, the more important it becomes so this support line has added significance. Chart support from the most recent closing low lies at 1,034.

For the Nasdaq, the 50-day exponential moving average, which has supported the advance since March, is at 1,912. Trendline support off the Sept. and Nov. lows comes in at 1905 and the recent low is at 1,882.

There have been some technical divergences of late, showing up on both the daily and more importantly, on the weekly charts. Along with these negative divergences, there have been some outright sell signals given by weekly indicators. Both the weekly MACD and the TRIX on the Nasdaq have dropped below their respective signal lines, issuing sells, and this is the first sell signals using these weekly indicators since February, 2002. Both the MACD and the TRIX are momentum indicators and the weekly signals point to a loss of Nasdaq momentum over the recent weeks -- and their weakness may indicate a decent-sized correction is finally in the cards.

We have been expecting a market peak early in December and weakness into at least the middle of the month. While it is possible to get one more shot to the upside, the weight of the evidence suggests a cautious stance is in order.

Arbeter, a chartered market technician, is chief technical analyst for Standard & Poor's

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