By Mark Arbeter
The stock market ended another week on the upside, with the majority of the gains coming on Thursday. Crude oil prices continued lower but stabilized around the $57.50 level late in the week while bond yields fell slightly, with the 10-year Treasury remaining above the 4.5% zone.
The S&P 500 rose for the third straight week, its longest winning streak since July. After bottoming at 1176.84 on Oct. 13, the index has advanced almost 5%. However, we believe the easy gains have been made and the going will get a lot tougher from here. The S&P 500 faces chart resistance between 1230 and the cyclical bull market peak of 1245. In addition, trendline resistance drawn off the March 2003 low and April 2005 low comes in at 1235. Trendline support lies at 1215 and then 1180. A host of key intermediate- to long-term moving averages come in between 1198 and 1209. Chart support is located at the recent low of 1170 up to 1215.
If the S&P 500 can break out to a new bull market high, additional pieces of resistance just overhead will probably come into play. The next key Fibonacci level, which is a 61.8% retracement of the entire bear market, lies at 1253. Fibonacci retracement levels have worked pretty well during the bull market, as the market stalled for sometime at both the 23.6% and the 50% level. The 38.2% retracement provided strong support during a pullback in 2004. Another piece of resistance that may cap the upside is a trendline drawn off the March 2005 and August 2005 highs that sits at 1260.
On Friday, the Nasdaq jumped back above the 2200 level for the first time since August, and has jumped about 8% since bottoming at 2037.47 on Oct. 12. The index is quickly approaching its cyclical bull market peak of 2218.15 from Aug. 2. Besides chart resistance at the previous high, key trendline resistance off the highs in 2004 and 2005 comes in at 2230. Trendline support for the Nasdaq lies at 2130 and 2075. Chart support sits in the 2030 to 2130 range, while a myriad of key moving averages lie between 2078 and 2124. In our view, for the S&P 500 and the Nasdaq to begin another leg of the bull market, both indexes will have to break above the trendlines that have capped the rallies in 2005 and 2004.
So far, only very short-term momentum indicators have moved into overbought condition, so in our view, there's more room for the market to run on the upside. The 6-day relative strength index or RSI (based on the S&P 500) rose to 75 on Thursday, its highest and most overbought reading since July. Often, the 6-day RSI will hit peak momentum between 75 and 80. The 14-day RSI is at 62 and is not considered overbought until it reaches at least 70. The 6-day RSI on the Nasdaq is up to 80, also the highest since July, while the 14-day RSI is at 67 and is not yet overbought. In addition, daily stochastics based on the price action of both the S&P 500 and the Nasdaq is sitting in overbought territory but has not yet rolled over and issued a sell signal.
The 10-day average of Nasdaq down/up volume, an indicator that measures how overbought the Nasdaq is using volume data, is approaching levels that in the past have preceded pullbacks or corrections. This average has fallen to 0.68 from 2.2 on October 18. Market weakness has been seen in the past when this ratio falls to around 0.60 or lower. Interestingly, on a longer term basis, this indicator has put in a series of lower highs since August 2004, implying that the selling pressure during the two pullbacks in 2005 were lower than the selling pressure seen during 2004 pullback. This could be interpreted as a positive for the Nasdaq, in our view, although the buying pressure during the 2005 rally, using the 10-day average of Nasdaq up/down volume, was less than the rally in 2004. Overall, it probably means a lack of conviction by investors to move firmly from one side of the market to other.
From a sector standpoint, the rally since mid-October has been led by a strong performance in financial stocks. Some of this may be due to the flattening yield curve as long-term rates are finally rising along with short-term rates. Basically, the whole yield curve is moving higher. The S&P Financial GIC is up over 6% over the last 30 days. From a sub-industry standpoint, participation has been fairly broad with Internet, airlines, general merchandise stores, hypermarkets, asset management, diversified chemicals, construction and engineering, and air freight all up over 8% during the last 30 days. On the downside, autos, and a broad list of the former leaders (energy and utilities) have gotten hit pretty hard. Once again, rotation among the vast sub-industries has kept the bull market alive.
Crude oil continued its more than 2-month slump, falling from $60.58 to $57.53 during the week. On Friday, crude hit an intraday low of $57.01, the lowest level since July 2005. We're expecting at least a decent bounce in the near term as crude oil has moved into an area of significant technical support. Trendline support, drawn off the recent lows, lies at $57.20. The 200-day exponential moving average, a key longer-term support level, comes in at $57.80. A 50% retracement of the rally from May until August is at $58.20. Chart support, from a sideways consolidation from back in the summer, is located between $56 and $61. In addition, daily momentum indicators are oversold but we have not seen any positive divergences with respect to the MACD or RSI. We think crude oil would have to rally above the $63 level, or above the downward sloping channel, to break the correction and resume the long-term uptrend. Long-term trendline support, if the $57 to $58 area gets taken out, is down at $53 and $50.
Yields fell a bit this week with the 10-year Treasury dropping 10 basis points to 4.56%. The 10-year is very close to trendline resistance at 4.55% and this trendline is drawn off the September lows. Additional resistance is found in the 4.42% area with both chart resistance and moving average resistance in that zone. Daily momentum indicators such as stochastics and MACD have rolled over from overbought areas, suggesting the possibility for a pullback in yields over the near term. However, weekly momentum indicators are still heading higher, and because of this, we believe yields are headed higher over the intermediate term. The next piece of chart support lies in the 4.7% to 4.9% area and we think yields could break through this support on their way to 5%+ by the end of this year or early next year.
Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's