The Market's Next Obstacle

A lot of investors who bought into earlier advances are stuck with losses -- and they may sell into the current rally to break even

By Mark Arbeter

While the market action over the last week has been positive -- and we believe that the intermediate-term trend has reversed to bullish -- the major indexes are once again faced with heavy overhead supply that will test the market's mettle.

The S&P 500 has moved into an area of heavy supply formed by the heavy volume buying day on Dec. 5, 2001. Heavy volume buy days are sessions that see well above average volume and where the days' price change is large and the close is sharply higher than the open. We have talked about this type of resistance in the past and these trading sessions seem to cause a lot of problems for the market. The price range on Dec. 5 was 1144 to 1174. The many investors that acquired positions in that range have been sitting with a loss for over three months and will look to break even now that the "500" has moved back into that buying range. The recent intraday high set on Jan. 5 was only a few points higher and comes in at 1177.

Other heavy buying volume days that saw a wide price range include Apr. 18, 2001, Jan. 3, 2001, and Apr. 4, 2000. The first two were caused by a surprise rate cut by the Federal Reserve. Once the market fell below the ranges of these heavy volume days, that range acted like a mountain of supply on top of the market, and the indexes subsequently fell sharply months down the road. Subsequent rallies back near or into these price ranges have all failed so far. Obviously, it will be very important for the market to see some closes above the 1180 area for any kind of sustainable rally to ensue. For the Nasdaq, the range from Dec. 5 was 1980 to 2057, so the index still has a little room to run before it moves into heavy supply.

A measurement tool can be applied to the S&P 500 because it recently completed a small, double bottom formation. Adding the width of the formation (50.36 points) to the breakout point (1124.72) gives a minimum short-term target of 1175.08, also right near the resistance levels mentioned above.

Some of the up-down volume indicators we incorporate in our market analysis have turned bullish for the first time since early October. An advance/decline line of the up-down volume on both the NYSE and the Nasdaq are in positive configurations. The NYSE up/down volume ratio had two days this past week over 4.0, a pretty healthy level, and both those days were on heavier than average volume. The 10-day up/down volume ratio has given a buy, rising to 2.2 for the first time (after a market downleg) since early October.

There has not been the normal powerful volume statistics on the Nasdaq but they are positive none the less. The 10-day up/down volume ratio should close today over 2.2, which is bullish. As of yet, there has not been one day on the Nasdaq where the up/down volume ratio has exceeded 4.0. Readings of 5+ have been common during the beginning of major uptrends. We may finally get a reading of 5.0 today. There has not been bullish signals yet from our 6-and 10-day summation models of up/volume on the Nasdaq but the 6-day may turn bullish today. The 10-day reading always lags but a couple days so that could turn bullish next week.

The first hurdle for the S&P 500 will be a couple of closes above 1180. However, there is further resistance from there all the way up to the low 1300s area. So overall, the market has turned the corner, but with heavy overhead supply, the advance over the weeks ahead is likely to be labored.

However, both the S&P 500 and the Nasdaq have traced out very large head-and-shoulders patterns (somewhat distorted due to the September, 2001 plunge) That implies a major long-term bottom is in place and that surprises over the next couple of years will be to the upside.

Arbeter is chief technical analyst for Standard & Poor's

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