Getting Back on Track?

The market continues to show signs that the worst of the current downtrend may be over

By Mark D. Arbeter

The stock market finally got some traction on Friday, Mar. 1, after spinning its wheels all last week, and sped right back up to important short-term resistance levels. While it appears that the market is attempting to turn the corner and head higher, volume measures so far have not inspired a great deal of confidence.

The S&P 500, after making multiple stands in the 1080 area, has moved back to the top of its recent trading range in the 1120 to 1125 zone. This resistance is important for a number of reasons. First, it represents the recent intraday high set in mid-February. Next, it is the area from which the market broke down from in late January. The last two points can frequently be seen in many charts and is one of the mainstays of technical analysis. Once an important support area is broken to the downside, it then becomes resistance or overhead supply.

The Nasdaq's chart formation is still less positive than the "500"'s because the index remains in a downtrend and has yet to put in a reversal formation. That may change soon, as the index is approaching resistance from the downward sloping trendline that has been in place since the high on Jan. 9. A close above the 1800 would reverse this downtrend and also allow the index to make a higher high for the first time since early January.

Our main concern continues to be a lack of strong volume during price advances. This is a clear indication that institutions are not jumping on board, and that some of the gains are coming from short covering and traders playing the ranges. Without major institutional support, there is little hope that the current doldrums will end. If the market can break out next week, it will be important that money comes in off the sidelines and pushes volume to above average levels. The 50-day average of NYSE volume is 1.3 billion shares and the 50-day average of volume on the Nasdaq is 1.7 billion shares. In conjunction with strong price and volume figures during a breakout, it will also be important to see strong up/down volume measures on the NYSE and the Nasdaq.

Overall, sentiment continues to improve (become more bearish on the stock market) and is now considered positive. There have been numerous daily readings of 0.98 or above on the CBOE put/call ratio. The 10-day and 30-day moving averages of this ratio have moved to bullish levels. Short-term sentiment polls are showing a healthy skepticism towards the stock market. The Consensus Poll has shown only 23% bulls for the last two weeks, the lowest level of bullishness since last April. The MarketVane poll is down to 33% bulls, the fewest since September. Investors Intelligence, a longer term poll of newsletter writers, is now at 46.8% bulls (fewest since mid-December) and 31.9% bears (most since early November).

One ongoing potential positive is the massive bases that the major indexes are tracing out. After major corrections or bear markets, the indexes usually put in either double bottoms or head-and-shoulder bottoms. The Nasdaq and the S&P 500 are in the process of tracing out head-and-shoulder reversal formations. However, these major reversal formations will not be complete until the neckline (drawn off the top of both shoulders) is taken out on heavy volume. These potential reversal formations are skewed (right shoulder well below left shoulder) because of the catastrophic-type low in September. Along with these big index bases, many technology stocks such as Cisco are also tracing out potential H&S bottoms.

While the market reminds us of an elevator in a two-story building or a rear-wheel drive car in the snow, it continues to show signs that the worst of the current downtrend have been seen. If the institutions get off the sidelines, a decent rally could ensue over the next couple of months.

Arbeter is chief technical analyst for Standard & Poor's

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