By Mark Arbeter
Last week proved quite interesting for many markets as some major psychological levels (big round numbers) were taken out and more secondary indexes hit 52-week highs. Japan's Nikkei 225 index broke above 15,000; gold futures rose above $500 per ounce, while the Dow Jones industrial average flirted with 11,000. Small- and mid-cap stocks broke out to all-time highs and semiconductor stocks and the Nasdaq 100 busted through to 52-week highs. Oil prices and bond yields reversed back to the upside.
The Standard & Poor's 500 index reversed sharply to the upside on Thursday, Dec. 1, after some early week selling, and finished just shy of its recent recovery high. Minor chart resistance lies up between the 1268 to 1270 area, which were the intraday and closing highs from last week. The next piece of intermediate-term resistance is up at 1280. This comes from a trendline drawn off the 2004 and early 2005 highs.
Because this trendline has contained prices for so long, we consider it to be very important for the health of the market. In our view, a strong break above this trendline would be bullish for stocks, as it would break the bearish wedge that has been forming since the beginning of 2004. Above 1280, the next piece of chart resistance is 1313 or the high from May, 2001.
On the downside, plenty of potential support lies just below current prices. There is minor chart support from last week's closing low at 1250. The 20-day exponential moving average sits at 1243 and the 50-day exponential moving average is at 1227. Chart support, from the highs in August and September, come in between 1241 and 1245. Trendline support, drawn off those recent highs, lies at 1235.
The Nasdaq pushed to new recovery highs this week and looks poised for additional gains, in our view. The index punched through key trendline resistance last week, taking out a trendline that has been in place since January 2004. The Nasdaq is now in an area of chart resistance from back in May 2001 that runs up to 2328. Chart and trendline support lie at 2230, with additional chart support at 2220 and 2200. The 20-day exponential moving average comes in at 2212 and the 50-day exponential average is at 2171.
The Nasdaq has benefited of late by a surge in the volatile semiconductor group. The Philadelphia Semiconductor Index (SOX.X ) has exploded to the upside, rising almost 19% since bottoming at 424.87 on Oct. 28. The index broke above key chart resistance at 484 on Thursday and is at its highest level since April, 2004. While we believe the action is positive from a technical perspective, much more work is needed in our view to turn the long-term picture positive. The index is still in a massive base that goes all the way back to 2002. The index has entered another area of large chart resistance between 500 and 560, and with the SOX fairly overbought, additional near-term gains may be difficult in our view. The index has only retraced about 25% of the losses seen during the bear market and is still below levels seen during 2004.
While the chart patterns of many indexes and individual stocks have improved quite a bit since October, the market has moved into fairly overbought territory and we think there could be a pullback at anytime. The 6-day relative strength index (RSI) for the S&P 500 hit 90 late last week, the most overbought since November, 2004. The 6-day RSI has rarely moved to 90 going all the way back to the beginning of 1999. The 14-day RSI rose to 75 last week, and this can also be considered as overbought.
Meanwhile, the 10-day rate-of-change (ROC) rose to over 4.4% in November, the highest since November, 2004. This has been a rare occurrence over the last two and one-half years and is another indication of how overbought the S&P 500 is. However, being very overbought does not necessarily mean the trend is about to change. In many instances, all that is needed to work off this condition is a pause in the rally. Time, as well as a price decline can alleviate overbought levels.
Sentiment continues to swing towards the bullish camp, which is no surprise given the recent price strength. The Investor's Intelligence poll of newsletter writers, currently 55.8% bulls and 21.1% bears, is the most heavily weighted towards the bullish side since August. This coincided with the last intermediate-term top. This can also be seen on the American Association of Individual Investors survey, which shows 57.3% bulls and only 16% bears. The Consensus and MarketVane polls are also tilted to the bullish side. Put/call ratios have fallen sharply since the middle of October, adding to the strength of the rally. However, they are at or near levels that in the past have signaled an overbought condition, which has often led to an intermediate-term top.
The 10-year Treasury yield fell right to chart resistance in the 4.4% zone early in the week, and then reversed sharply to the upside on Tuesday, rising back above 4.5%. The recent decline in bond yields retraced about 38.2% of the rise in yields from early September to early November. This retracement is small but fairly typical and suggests to us that the intermediate-term trend in rates is still intact. Daily momentum indicators have turned up after moving to an oversold condition, and in our view, suggests that higher yields lie ahead. The 10-year Treasury has chart support in the 4.6% to 4.7% zone, which was the recent high. A break above this support would then target the next area of chart support in the 4.8% to 5% area.
Crude oil prices reversed sharply to the upside on Wednesday, Nov. 30, after testing the 250-day exponential moving average for the second time since mid-November. Prices finished the week at $59.32 per barrel, up from Tuesday's closing low of $56.50. In the process, crude completed a small double bottom reversal formation and appears headed for important trendline resistance up at $60.50. We think a break above this trendline, which has contained prices since late August, would reverse the bearish intermediate-term trend. The rally on Friday, Dec. 2, did take out an internal trendline that has acted as resistance since mid-October. Daily momentum indicators have turned higher, suggesting the possibility that the correction is over. In our view, a strong break above $61 would target the $63 to $65 area.
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|A-||Above Average||D||In Reorganization|
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In the U.S.
As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 28.7% of issuers with buy recommendations, 60.3% with hold recommendations and 11.0% with sell recommendations.
As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.8% of issuers with buy recommendations, 44.8% with hold recommendations and 20.4% with sell recommendations.
As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 28.1% of issuers with buy recommendations, 51.1% with hold recommendations and 20.8% with sell recommendations.
As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 29.3% of issuers with buy recommendations, 57.7% with hold recommendations and 13.0% with sell recommendations.
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1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.
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Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's