Hitting a Wall
By Mark D. Arbeter
The market continues its trek sideways, usually a positive after a big move higher. Recent action has been fairly constructive, with the sideways consolidation that has existed since mid-April providing support during the latest pullback.
Short-term chart support levels come in at 2078, 2056 and 2000 for the Nasdaq with short-term resistance at the recent highs of 2265 and 2328. For the S&P 500, short-term support lies at 1245 and then 1200 with resistance at 1287 and 1316.
The reason for this pause or jagged trading of late, which should be clear by now, is that the market has run into a wall of resistance overhead. The more critical area of resistance comes from the rally in January and runs from 2250 to 2892 on the Nasdaq and 1275 to 1383 for the "500". Both indexes have run up into the bottom of these ranges, and as expected, supply hit the market and prices corrected.
The market will most likely have to take numerous advances into these areas, and eat up this supply before a more sustainable advance can take shape. We therefore maintain that the upside is capped for the short to intermediate term.
Internals remain mixed for the Nasdaq but are fairly constructive on the NYSE. Up/down volume indicators on the Nasdaq remain mixed and reflect the lack of commitment towards the technology group. The main technology sectors, software, hardware, semiconductors, and Internet components, remain deep within their bases and have shown little ability to break out of these trading ranges. One group on the Nasdaq that has begun to exhibit some leadership is the healthcare stocks, however, this group does not have enough weight to push the index to any degree.
On the NYSE, price breadth is positive but volume breadth is mixed. There has been much written about the rising advance/decline line on the NYSE, but like the Nasdaq, many NYSE stocks that are advancing do not have much weight from a market cap perspective and therefore cannot push the NYSE or S&P 500.
Bullish sentiment has backed off a bit during the latest retreat but we would prefer a more cautious stance at this point. The American Association of Individual Investors poll showed a sharp drop in the level of bullishness over the last week, declining to 49% from 62%. However, bearish levels on the Investors Intelligence poll fell to a dangerous 30.5%, the lowest level of bears since February. Readings of 30 or below have occurred of late at the beginning of corrections so some caution is warranted unless the level of bears starts to rise again.
The 10 year Treasury rallied back into resistance between 5.1% and 5.3% and now looks like it is reversing again to the downside. Critical support lies at 5.5% and we expect this level to give way as the 10 year moves to our target of 6%+.
More choppy action is probably in the cards during the next couple of months as the market attempts to work through the heavy supply of stock overhead.
Arbeter is Chief Technical Analyst for Standard & Poor's