A Home in the Range
By Mark Arbeter
The recent price action of the stock market is like that of an elevator in a two-story building: a lot of movement with little or no progress. The environment for stocks remains extremely uncertain, with many crosscurrents. This creates a great platform for traders but must be wearing thin on long-term investors. With heavy resistance overhead and good long-term support below, the markets' intermediate-term outlook is likely to be one of directionless trading.
The S&P 500 has run into a brick wall in the 1175 area, failing three times since early December. There is good reason for these failures. First, this zone represents the bottom of the trading range for the "500" during the months of July and August this past summer. Once a sideways consolidation is taken out to the downside, the breakdown area then becomes resistance.
Second, the first attempt to break through this area on Dec. 5 created a heavy volume up day, and this type of daily action has wreaked havoc with the market since the peak in 2000. A heavy volume up day is a session that sees well above average volume -- and where the day's price change is large and the closing level is sharply higher than that of the opening. The price range for 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 take advantage of the "500"'s move back into this area, selling stocks to break even.
Other heavy volume up days that also had wide price ranges 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 price 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 it will be very important for the S&P 500 to clear this zone of resistance for any kind of sustainable rally to ensue.
Chart support for the S&P 500 lies between 1125 and 1154. A 50% retracement of the rally since February would target 1124. Major support comes in at 1080, the low seen in February, 2002, and March, 2001.
The Nasdaq has also advanced into heavy chart resistance but has yet to reach the supply of stock created by the heavy volume day on Dec. 5. The Nasdaq range for that day is 1980 to 2057. However, the index has moved into supply created by the heavy volume day on Apr. 18, 2001, that runs from 1923 all the way up to 2129. The Nasdaq failed in this area in both December and January. Chart resistance for the Nasdaq is in the area of 1930 and was created by the sideways action from two different time periods: the summer of 2001 and December, 2001. Trendline resistance, drawn off the May '01 and January '02 peaks comes in near the 2030 zone, just another hurdle for the Nasdaq. Overall, the index is likely to have a tough time making much headway over the next couple of months.
Chart support for the Nasdaq lies between 1790 and 1860 and a 50% retracement of the latest advance comes in at 1821. More important intermediate-term support lies at the lows seen in February around the 1700 level.
Volume measures on both the NYSE and the Nasdaq have deteriorated to neutral after turning bullish in late February and early March. There were some very weak down/up volume statistics on the Nasdaq recently, but fortunately, the total volume those days was lighter than average. It is not encouraging to see such poor volume numbers so early in a new advance. While one or two days of weakness are not enough to kill the rally, it does show that the Nasdaq is still on weak footing relative to the S&P 500, the Dow Jones industrial average, and the NYSE.
Sentiment is mixed, suggesting that the market is not likely to run sharply in either direction. Short-term investment polls (Consensus, MarketVane) have moved to neutral readings from bullish readings just a few weeks ago. A longer-term investment poll (Investor's Intelligence) is still weighted far too heavily to the bullish side, with 52% bulls and 30% bears. These are not the type of sentiment readings that usually occur before a major advance. Daily CBOE put/call ratios have been fairly high, but the 10-day p/c ratio recently fell to the lowest level since late January.
With heavy supply limiting the upside and major support marking a floor, the market is likely to drift sideways in the months ahead.
Arbeter is chief technical analyst for Standard & Poor's