A Short-Term Bounce
By Mark Arbeter
The rally that started on April 4 has been very powerful and, from a technical point of view, suggests that a short-term low is in. The S&P 500 Index and the Dow Jones industrial average have each completed a bullish, double-bottom formation. The Nasdaq has broken out of a bullish inverse head-and-shoulders pattern and has been exhibiting extremely strong up/down volume measures.
The recent gains in the major indexes have reached historical proportions. The Nasdaq has exploded 33.2% in 10 trading days (ended Apr. 19), the largest 10-day rate-of-change in its history. The S&P 500 rose 13.6% during this time, and since 1970, this rise has been exceeded only by the early bull market rallies in 1974, 1982, and 1987.
While the short-term picture has improved, both the Nasdaq and the S&P 500 are technically in intermediate-term downward channels. The current rally is likely to run out of steam over the next couple of weeks because the major indexes are facing major resistance.
The Nasdaq's chart and trendlines (drawn off the early September high) suggest that it will most likely meet resistance at the 2300 level. The S&P 500 should encounter resistance near the 1280 level. The indexes will likely retrace about 33% to 50% of their gains off the lows before another advance can begin. This second advance would most likely take place during the summer. If the indexes can advance above their closing levels of 2000 (2470.52 for Nasdaq and 1320.28 for the S&P 500), the fall/winter tax selling season will not be nearly as devastating as it was last year.
Historically, brutal bear markets do not end with a couple of weeks of strength. The bottoming process for the S&P 500 in 1974 took about three months to complete, the low in 1982 lasted five months, the 1990/91 bottom continued almost five months, and the near bear market in 1998 lasted a month from the initial low. With the exception of 1990/91, these lows were marked by double bottoms.
However, in light of the recent strength, and the Federal Reserve's aggressive easing stance, the bottoming process may not take as long this time, and in fact, could be mostly complete. In 1999 and 2000, the Fed was trying to put a ceiling on stock prices to cool the economy, and in 2001, the latest interest rate action is an indication that the Fed is attempting to put a floor under stock prices to help turn the economy around.
The indexes' bottoming formations have so far been short term, but some of the major stocks in these indexes have been basing for months. The Philadelphia Semiconductor Index has been moving sideways for four and a half months.
So, even though the Nasdaq's base has been short, many of its technology components have been going through extended basing action normally witnessed at an intermediate-term low. While Cisco and Sun Microsystems probably have more basing to do because they just made new lows, Intel and Dell have been basing for months and are in better condition to move higher.
Many stocks are well below their recent highs, and so have a lot of supply to work through. This dichotomy in chart patterns among the techs and the huge amount of overhanging supply could prevent any sustained advance in the next couple of months.
While the short-term outlook has certainly improved, the market still has some work to do before an intermediate-term uptrend will be seen.
Arbeter is Chief Technical Analyst for Standard & Poor's