By Mark Arbeter
A late-week rally by the market last week pulled stocks out of their recent doldrums and set the stage for potential gains ahead. The reversal by the stock market came at an important time because the distribution days have been adding up of late. The major indexes have moved into decent areas of resistance and so there will be some work ahead if new recovery highs will be seen over the next couple of months.
The S&P 500's closing low for the week was 1,118.15 on Tuesday, Apr. 20, right in an area of good chart support. We believe the zone from 1,120 down to the March lows of 1,090 represent good chart support. A 50% retracement of the rally (common corrective action after an advance) from Mar. 24th until Apr. 5 targeted the 1,118.81 level. Additional support down near the March lows is the 1,093 level and that represents where the 150-day exponential moving average comes in. A new level of short-term support has been formed by a trendline off the March and April lows, and that comes in at 1122. The 50-day exponential moving average, which has really flattened out, comes in at 1128.
On the upside, the intraday high for the S&P 500 during the week was at 1,142.77, right in a minor layer of chart resistance that runs from 1,135 to 1,150. The major block of chart resistance for the "500" is located between 1,140 and 1,163. Minor trendline resistance, drawn off the last March peak and the recent top in early April, lies at 1,144 or right where the index stalled this week. The top Bollinger Band and often short-term resistance lies at 1,154.
The Nasdaq's closing low for the week was 1,978.63, just below very good chart support in the 1,990 area. The index only closed below 1,990 for one day, and we have often said that it takes a couple closes below support as well as some distance (2% to 3% for the Nasdaq) to confirm a true breakout to the downside. This retracement was also close to 50% of the late March to early April rally. The closing low for the Nasdaq during this correction remains down at 1,902 and we consider this area critical intermediate-term chart support. The 200-day simple moving average for the index lies at 1,926.
Besides bouncing off of chart support this week, the Nasdaq was supported by a trendline drawn off the late January and early March peaks. Up until early April, this trendline was considered resistance. On the upside, there are multiple pieces of resistance that run from present prices up to the highs in January of 2,154.
Early last week, before the stock market turned higher, volume-based indicators were approaching worrisome levels. If we were still in a bear market, a large amount of caution would have been warranted. These indicators and models that compare advancing volume and declining volume on both the NYSE and the Nasdaq had deteriorated due to the pickup in selling by institutions. The positive piece of the volume puzzle so far is that the up/down volume statistics have not been as weak as they were during the lows in March. The price surge on Thursday, Apr. 22, on pretty good volume statistics, went a long way in repairing the recent damage.
Market sentiment has once again seen some investment polls move back to bullish extremes. Bullish sentiment on MarketVane is currently at 64%, not far off the recent high of 70%. Sentiment on the American Association of Individual Investors has completely reversed over the last week and now is showing 63.8% bulls and only 13.7% bears. This is the highest level of bullish sentiment in 12 weeks and the lowest level of bears in 6 weeks.
The bond market has shaken up the stock market quite a bit of late. It appears that the chart for the 10-year Treasury note is tracing out a massive, long-term reversal formation. The 10-year note is approaching critical support in the 4.5%-4.6% area, and rose to an intraday high of 4.482% on Wednesday. This is highest yield for the Treasury note since September 5, 2003. The 10-year has already broken a bullish trendline that has been in place since January, 2000. If the 10-year Treasury breaks above the 4.6% level, we could easily see a back up in rates to between 4.8% and 5.2%.
The sharp increase in interest rates has given the U.S. dollar a shot in the arm, adding to its recent strength. The dollar traced out a small double bottom during January and February, completing this bullish formation on a breakout in early March. The dollar then traded sideways before breaking out again last week, just as the bond market was getting hammered. The U.S. dollar index has major trendline resistance, drawn off the peaks over the last couple of years, between 91 and 92. The dollar has rallied right up to its 200-day simple moving average at 91.25.
Long-term momentum models have turned the corner, but have not yet given buy signals. If we are correct that the bond market is tracing out a long-term top, then the implications for the dollar over the long-term would be bullish.
Arbeter, a chartered market technician, is chief technical analyst for Stabdard & Poor's