By Mark Arbeter
Following a very poor start last week, the stock market came roaring back, pushing the blue chip indexes back near recovery highs. From an intermediate-term perspective, the major indexes remain range bound within the confines of a long-term uptrend. We would like to see the S&P 500 index and the Dow Jones industrial average break out strongly to new recovery highs before turning more constructive on the market. We believe trading ranges are tough to call, and even tougher to trade, so we believe the safest place to be is on the sidelines until the all-clear signal is given.
A strong breakout above the 1,218 level for the S&P 500 would then bring our next technical target of 1,253 into view. This target was arrived at with the use of two completely different types of analysis. The first is a very basic technical tool, adding the width of a consolidation to the breakout point. The second represents the next Fibonacci resistance of a 61.8% retracement of the bear market. We believe the timing of a move to 1,253 or above could happen in the first half of the year due to cycle analysis. The 20-week cycle just bottomed out in late January, so the next 20-week cycle low is not due until the middle of June. The more dominant 77-week cycle is due to bottom out in February, 2006, so we continue to see some type of major peak during the second or third quarter of this year.
On the downside, the S&P 500 has near-term chart support at 1,184 and then 1,164. The 50-day exponential moving average lies at 1,189, the 80-day exponential moving average is at 1,180 and the 150-day exponential moving average is at 1,161. Intermediate-term trendline support, drawn off the lows in August and October, lies at 1,150 and long-term trendline support, off the lows in March, 2003, and October, 2004, comes in at 1,170.
The Nasdaq got very close to testing its Jan. 24 low of 2,009, falling as low as 2,023 on Thursday of last week. Besides the chart support in the low 2,000 area, the Nasdaq also found support from its 150-day exponential moving average, which lies at 2,028. As we have been saying, the Nasdaq continues to lag the blue chip indexes both from a price perspective and internal perspective. We continue to believe that the Nasdaq is in a long-term basing formation following the brutal bear market, and that overhead supply will continue to hamper the index's ability to move into a long-term, sustainable uptrend.
From an intermediate-to long-term standpoint, the Nasdaq has important support right below the 2,000 area. The 200-day simple moving average lies at 1,985. Also, long-term trendline support, drawn off the March, 2003, and August, 2004, lows comes in at 1,990. On the upside, the 50-day exponential moving average is at 2,071 and chart resistance lies at 2,100.
One component of the Nasdaq that could certainly help the index: the action of the semiconductor stocks. Like the Nasdaq, the semiconductor stocks are in long-term bases after the vicious bear market that decimated many stocks. Of late, there has been positive action from the semiconductors with the Philadelphia Semiconductor Index (SOX.X ) up almost 15% since bottoming out at 383 on Jan. 24. The index still needs a strong close above the 450 level to break out of the range that the index has traded in since last July. The S&P GICS Semiconductor Equipment Index is in a similar chart formation, and is also very close to breaking out above key resistance at 440.
If the SOX can break above 450, it would run into trendline resistance up near 500, and chart resistance between 500 and 560. Weekly momentum for the SOX is bullish, so this group bears watching. A non-traditional MACD, using the difference between a 19-week exponential moving average and a 39-week exponential moving average, plotted on top of a 16-week exponential moving average, gave a buy signal on the SOX in the middle of November. This is the first buy signal from this indicator since November, 2002. The indicator had been bearish during most of 2004.
There was an interesting development this week with respect to a sentiment indicator we monitor. On Tuesday, a day the market got hit pretty hard, Odd-Lot Short Sales soared to 3.1 million shares, the highest we have ever seen. The most recent highs occurred in two separate days in January when over 2.6 million odd lots were sold short. Odd-lot short sales are primarily executed by individual investors and can be used as a contrarian indicator. Odd-lot short sales spiked three times last year, in March, May and August, and were associated with the market bottoms during 2004.
Crude oil futures blasted higher again last week, finishing above the $50 per barrel level for the first time since the beginning of November. Oil prices have broken through a couple of pieces of short-term chart resistance and we think that prices are headed for a test of the October highs in the $55 area. A breakout above the $55 area, which we expect, would then target the $64 zone, based on long-term trendline resistance and Fibonacci analysis. While it has been tough to call the stock market based on oil prices, we sense that oil above $60 may put a ceiling on the stock market.
5-STARS (Strong 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 (Buy): 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 (Sell): 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 (Strong 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.
As of December 31, 2004, SPIAS and their U.S. research analysts have recommended 26.5% of issuers with buy recommendations, 61.3% with hold recommendations and 12.2% with sell recommendations.
All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
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Arbeter, a chartered market technician, is chief technical startegist for Standard & Poor's