By Mark Arbeter
The post-election rally that many had forecast propelled the S&P 500 index to its highest level in two and one-half years last week, and we believe further gains lie ahead. While the S&P 500 is susceptible to some profit-taking after surging over 6% since the Oct. 25 low, a strong break above the 1,160 level gives us new readable targets up in the 1,250 area going out into the middle of 2005.
After being mired in a consolidation since January, between 1,063 and 1,158, the S&P 500 exploded to the upside on Wednesday, Nov. 3, and then added even bigger gains on Thursday, Nov. 4. Volume on both days was way above average, and hit the highest levels since June 25, confirming the price strength and indicating that institutions are moving back into stocks. If the S&P 500 can break strongly above the 1,158 level, which we expect, then we can calculate a target for the S&P 500 up at 1,253. This target is arrived at by adding the width of the consolidation (95 points) to the top of the range.
The next identifiable target mechanism is Fibonacci retracement levels. If you remember, the S&P 500 retraced 50% of the bear market when the index peaked earlier this year. From a technical perspective, the 50% retracement area provides both excellent support and resistance when looking at intermediate-and long-term market moves. The next key Fibonacci level would be a 61.8% retracement of the bear market and that would target the 1,253 zone, exactly the level we arrived at using a completely different type of technical analysis in the preceding paragraph.
The Nasdaq composite index broke back above 2,000 for the first time since June, and in the process, took out an important trendline drawn off the highs from April and June. The index still has more chart resistance to work through, as the correction was deeper than the 500's. The first piece of chart resistance is 2,050, or the high from June. The next area of chart resistance is from the April high at 2,080, and the final piece is at the top of the range up at 2,153.
If the Nasdaq can break above the top of the range at 2,153, a target of 2,555 would come into play. This is arrived at by adding the width of the correction to the top of the range. The Nasdaq retraced about 23.6% of the bear market when it peaked in January. This represents the first key Fibonacci retracement target. The next Fibo retracement would be 38.2% of the bear market and this would target the 2,614 level. There is also a fair amount of chart resistance in the 2,500 to 2,600 area from back in 1999 and 2001.
What continues to be a positive for the market is the broad participation by so many stocks and industry groups. The NYSE advance/decline line broke to a new recovery high back in August and has pushed higher ever since, despite the market's pullback in October. Since the final bear market low in March, 2003, the NYSE A/D line has been in a strong uptrend. Strength has been very diverse, with gains seen in energy, materials, industrials, utilities, telecom, transportation, consumer cyclical, and some technology as well as some financial areas.
This very broad participation is a welcome change from the heydays of the late 1990s when a few large cap techs were pushing the indexes higher. The current move has included many sectors and many different capitalization classes. The S&P SmallCap 600 and the S&P MidCap 400 broke out to new all-time highs this week. The DJ Utility Index hit a new 52-week high while the DJ Transportation Index moved to the highest level since 1999, and is very close to posting an all-time high. The Morgan Stanley Cyclical Index busted out to an all-time high, while the S&P Bank Index (BKX ) moved very close to an all-time high.
Certainly, one big positive last week for the stock market was the large decline in crude oil prices. After climbing over $55 two weeks ago, crude oil has fallen to chart support in the $48 to $49 area. A break of this zone would then target stronger chart support down at $44. Long-term trendline support lies in the low $40s zone. While we believe the long-term trend in crude oil prices is still higher, further declines in the short-term are certainly possible.
The U.S. Dollar Index broke another important support level this week, while gold prices moved to a new recovery high. The Dollar Index fell below 85 and is now at the lowest level since 1995. The 85 level was important because it represented the bear market low from back in January and February. The next piece of chart support lies at 80, which was the low in 1995. Back in 1992, the Dollar Index had moved to a low of 78. A move below 78 would take the dollar to the lowest level for at least the last 30 years. Gold, a major beneficiary of a weak dollar, rose to its highest level since 1987.
As of September 30, 2004, SPIAS and their U.S. research analysts have recommended 29.2% of issuers with buy ratings, 58.5% with hold ratings and 12.3% with sell ratings.
5-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.
4-STARS (Accumulate): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.
2-STARS (Avoid): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.
1-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.
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Arbeter, a chartered market technician, is chief technical analyst for Standard & Poor's