By Mark Arbeter
The recent pullback among the major averages was driven by a fear of round numbers. The Nasdaq composite index ran out of gas the week before last up at the 2,000 level, while the Dow Jones industrial average hit a temporary wall at 10,000 early last week.
After briefly piercing 2,000 on Dec. 3, the Nasdaq fell 5.7% from intraday high to the intraday low on Dec. 10. The index broke slightly below its key 50-day exponential moving average, but like they have since March, institutions stepped to the plate and rallied the Nasdaq back above the 50-day with a fairly impressive intraday turnaround on Wednesday which was followed by nice gains on Thursday. The quick pullback moved the index back into an oversold condition on a short-term basis.
If the recent trading pattern -- falling slightly below the 50-day exponential average and then rebounding - holds, the Nasdaq should now run back above the 2000 level and set new recovery highs before the next pullback takes hold. However, there are certainly signs that gains from here, as they have been for the last couple months, will be hard-fought. There have been signs of some distribution by institutions of late, but so far, not enough to derail the intermediate-term advance.
One of the key components of the Nasdaq, semiconductor stocks, have weakened a bit of late and could be a precursor of further problems for the Nasdaq. The Philadelphia Semiconductor Index, or SOX, sold off hard during the last week with volume levels above average during the last two sell-offs. The SOX was able to regain its 50-day exponential moving average but may have trouble moving much above recent highs. The index ran into a huge zone of chart resistance that runs from 500 to 700 and it will take time and volume to work much higher from here.
The Nasdaq has been hanging around the mid-1,900 area for the last couple of months and there is good reason for this. As we have mentioned in previous comments, there is a zone of heavy chart resistance that runs from 1,925 all the way up to 2,300. Another important resistance level for the Nasdaq is 2,070, which represents a key Fibonacci retracement of 23.6% of the bear market losses. Support from the 50-day exponential moving average lies at 1,915 with trendline support at 1,900. Chart support or the recent low comes in at 1,882.
The S&P 500 barely budged during the Nasdaq's pullback and is back near the recent highs in the 1,070 area. The S&P 500 has a large zone of chart resistance between 1,075 and 1,177 and is also going to have a tough time making much progress from here in the near term. Trendline resistance lies at 1,085, with longer-term trendline resistance at 1,125. The 50-day exponential moving average and key support comes in at 1,047 with trendline support also in this area. Chart support for the S&P 500 from the recent closing and intraday low is in the 1,030 to 1,034 area.
Sentiment remains wildly bullish among the investment polls and while this factor has not caused a correction in the market, it has essentially capped gains of late. The American Association of Individual Investors poll is tilted heavily towards the bullish camp with 69.4% bulls, the highest since June, and only 14.4% bears, the lowest since October. Also, bulls/bears on this poll rose to 4.82:1, the highest since June.
The one piece of sentiment that has supported the market's move higher is starting to see some cracks. CBOE put/call ratios have risen quite a bit during the pullbacks we have witnessed since the bottom in March, showing a willingness among option players to protect themselves against the downside. The latest pullback, while not much on the blue chip averages but decent for the Nasdaq, did not see an uptick in put/calls. If this pattern continues during market weakness, it will be an important sign of trouble ahead.
The trend in the U.S. dollar and commodity prices continues almost unabated. The U.S. Dollar Index remains firmly entrenched in a bear market and has dropped to its lowest level since late 1996, recently closing in the 88.50 area. As with many bear markets, they have a tendency to retrace the entire bull market that preceded them. This would take the dollar back to the 80 level, where it started its bull run in 1995. The Commodity Research Bureau Index broke out to another new recovery high and is now at the highest level since April, 1996. The CRB Index is up over 40% since the bottom in October, 2002.
Arbeter, a chartered market technician, is chief technical analyst for Standard & Poor's