Two of a Kind

The S&P 500 and Nasdaq have displayed very similar (bearish) chart patterns

By Mark D. Arbeter

The major indexes have been moving almost in lock-step from a chart pattern perspective and from a retracement basis. While the recent corrections have been different in scope, with the Nasdaq falling 15% and the S&P 500 dropping 8.6%, this difference in performance is fairly typical.

A look back at recent history shows that similar patterns between the major indexes are actually quite common after a major low has been put in and during the initial rally. The formations tend to diverge as the rally ages. One of the reasons for this is that there is more focused leadership the further a bull market travels, and that can affect the indexes more than in the beginning of an advance.

Both the Nasdaq and the "500" peaked intraday on May 22. This occured while they were both tracing out bearish head-and-shoulders formations. The "500" traced out its right shoulder on June 6 and busted its neckline on June 13. The Nasdaq did the exact same thing a day later. Both indexes are now in the process of moving to the underside of their respective necklines, a fairly common formation. A failure at the neckline (S&P 500: 1250, Nasdaq 2105) would be negative and probably lead to a completion of the H&S formation, taking the S&P 500 to 1180 and the Nasdaq to 1850.

The indexes have also retraced about half of their moves from the March/April lows to the May highs, a very common retracement. The Nasdaq, so far, has retraced 50% of the move while the "500" retraced 48%.

The recent lows for both indexes occured in an area of very good chart support so there is a 50/50 chance that they will hold. The area of support comes from an extremely heavy volume day on Apr. 18 when the market really took off due to the surprise intermeeting rate cut by the Federal Reserve. The volume during that big rally was the second heaviest on record for both indexes. Because of the huge volume that day, there is a very large vested interest in that zone which starts at 1192 for the S&P 500 and 1942 for the Nasdaq.

Interestingly, this means that the two surprise rate cuts (Jan. 3 and Apr. 18) and the heavy volume they created now represent a day of important overhead supply and a day of strong underlying demand. If only the Fed knows what they have created. If the two levels above are broken to the downside by more than a couple percent, it could mean trouble for the markets and a possible retest of the March/April lows.

The three Nasdaq up/down volume indicators that we follow are all bearish. The NYSE up/down figures are also bearish. The difference between new highs and lows on the Nasdaq has also turned negative while the NYSE new high/low data is very close to turning negative.

With short-term chart patterns still in bearish formations and internal data negative, caution is warranted until another low is in place.

Arbeter is Chief Technical Analyst for Standard & Poor's

Before it's here, it's on the Bloomberg Terminal.