By Mark Arbeter
The major indexes rallied for the second straight week last week, with the S&P 500 very close to challenging its recovery highs from early August. Even if the S&P 500 can break to new highs for the year, there are still some key pieces of resistance that will have to be dealt with, in our opinion. With the market rallying during the historically weak period of September, and in the face of plenty of negative news, we believe stocks can continue to move higher over the near-term, in our view.
The S&P 500 has rallied about 40 points since its intraday low of 1201 on Aug. 30. The most recent closing high, and a cyclical bull market high, was 1245.04 on Aug. 30. The next key level of resistance above 1245 is at 1253. This level is important for a couple of different reasons. First, it represents a Fibonacci retracement of 61.8% of the bear market from 2000 to 2002. Secondly, trendline resistance drawn off the peaks in January, 2004, December, 2004, March, 2005, and August, 2005 comes in right at 1253. This is obviously a key trendline because it has capped all rallies over the last 20 months.
If the S&P 500 can take out the 1253 zone, then we have to look all the way back to 2001 to gauge where the next piece of chart resistance may lie. There is a layer of chart resistance from the middle of 2001 that runs between 1250 and 1315. In addition, there is a huge zone of chart resistance, in our view, from 1998, 1999, 2000 and 2001, that begins at 1240 and runs clear up to the all-time highs. In our opinion, this will be a tough area for the S&P 500, and will take considerable time to work through.
The Nasdaq has a little more work to do than the S&P 500 to get back to new recovery highs, with the index sitting about 2% below the Aug. 2 closing high of 2218.15. In addition to this chart resistance, trendline resistance off the lows in April and July comes lies at 2200. This trendline was originally support for the Nasdaq until it was taken out in the middle of August. We believe more important trendline resistance comes in at 2223. This is a longer-term trendline drawn off the highs in January, 2004, December, 2004, and August, 2005, and like the S&P, has contained prices for quite some time.
Daily momentum indicators, including the moving average convergence/divergence (MACD) and stochastics, have turned bullish and are not yet overbought. Short-term relative strength (RSI) readings, such as the 6-day and 14-day, are back above the 50 level, a positive sign in our opinion, and are not yet overbought.
Weekly technical indicators, however, remain another story. The weekly stochastics indicator, after getting very overbought in July, has backed off into neutral territory, which could allow the Nasdaq to run a bit. However, it wouldn't take that long for this indicator to get overbought again and put in a lower high, which would set up a negative divergence. Typically, before a correction, the weekly stochastics will put in a series of negative, nonconfirmations. The weekly MACD has been tracing out a series of lower highs since the beginning of 2004, indicating waning momentum, and suggesting trouble down the road in our opinion. However, a strong breakout above the resistance levels we mentioned could eventually invalidate some of these warnings in our view.
Two industries that are extremely important for the health of the Nasdaq, and make up a big part of its capitalization, are the biotechs and the semiconductors. Taking a look at the charts of these two industries suggests that the Nasdaq is in pretty good shape, in our view, at least in the short term. The AMEX Biotech index (BTK ) has been one of the strongest performers since the beginning of April, rising 33% since April 4. The BTK is at its highest level since June, 2001, and is only about 150 points away from its all-time high of 800 from back in September, 2000. In our view, this is a pretty amazing turnaround considering that the BTK plunged 65% during the bear market.
While the Philadelphia Semiconductor index (SOX.X ) has not retraced nearly as much as the biotech index, its chart does look positive for the near-to intermediate-term in our opinion. In July, the SOX broke out to its highest level since the middle of 2004, and in the process, took out some key chart and moving average resistance. During August, the index consolidated its gains and just recently, the index started an assault on the Aug. 2 high of 486. A break above 486 would set the SOX up, in our view, for a run to the next area of chart resistance between 530 and 550.
Crude oil prices backed off this week, falling from $67.57 per barrel to $64.00. In the process, crude oil took out trendline support off the lows in May, July, and August. We believe oil's spike to over $70 per barrel following Hurricane Katrina represented at least a short-term top for oil prices, and more likely an intermediate-term top. The next area of strong chart support lies in the $57 area. The 55-week exponential moving average, which provided good support in December, 2004, and May, 2005, lies at $53. The market is very overbought on a weekly basis, with a negative divergence on the 14-week RSI chart. We expect crude oil to correct back to the $50 to $60 range over the next couple of months.
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Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's