Trying to Find the Bottom

S&P is projecting that the final low will occur sometime in the fall months

By Mark Arbeter

The market is continuing its attempt to trace out an intermediate-term bottom, but so far, it has failed to generate enough follow-through buying to suggest with any kind of confidence that a new uptrend has begun. From a longer-term perspective, we are now projecting that the final low will occur sometime in the fall months. While this final low may still be above the lows set in September, 2001, it may well represent a more pronounced launching point than any intermediate-term low since the market peaked in 2000.

With the seemingly unending bear market, we still don't get the feeling that investor psychology has completely turned away from the stock market, an indication that one would expect after two plus years of crashing stock prices. With the Nasdaq off nearly 70% from its Mar. 10, 2000, high and the S&P 500 down almost 30% from its Mar. 24, 2000, peak, many investors attitudes seem to reflect more of a anxiety about missing the next great bull market than thinking about preserving the capital they have left. Until long-term views of the market change to more realistic expectations, and investors stop trying to make up what they lost, a major low probably will not be seen.

For the near-term, the S&P 500 is testing support in the 1074 to 1080 area. So far, the latest little pullback has occurred on lighter-than-average volume, which is a positive. This suggests that the buyers have temporarily stepped aside. Intermediate-term and more critical support lies at 1050, or the low set on May 7, 2002. Short-term resistance for the "500" runs from current levels up to 1107, with another ledge of resistance between 1110 and 1133. The chart pattern on the S&P 500 is fairly constructive near-term, with the index tracing out a series of higher highs and higher lows. The "500" has also taken out a downward sloping trend line drawn off the March and April peaks.

While overhead supply remains heavy, a close above 1133 would most likely lead to an advance back to the top of the trading range (1175 area) that has existed since October, 2001. Due to the duration and magnitude of the decline since March, as well as other factors, we believe that the market will attempt to move higher over the next month or so. However, if the "500" does close convincingly (1% to 2% on increased volume) below 1050, that would set-up a test of the price range seen the day after the Sept. 21, 2001 low (9/24/01) -- or between 966 and 1008. This is the price range where demand finally overcame supply and is also an area where long-term investors stepped in to support the market. Sub-1000 levels (923) on the "500" also represent the bottom in 1998.

The Nasdaq remains in an intermediate-term downtrend as the series of lower lows and lower highs has yet to be broken. The index has traced a series of higher highs and higher lows since the bottom on May 7, 2002, but the overriding bearish trend line drawn off the January and March highs is still intact. Short-term resistance runs from current levels up to 1759, with the next point of resistance up at 1832. A break above 1832 would be positive and would suggest a quick lift up to the mid-1900 area. Near-term support for the Nasdaq comes from the price range on May 8 (a heavy volume buying day) of 1626 to 1696. If that area were to give way, the recent closing low of 1574 would be the last line of defense before a test of the September, 2001, lows down in the low 1400 zone.

While a turn in the market could be near, it is too early to place your bets.

Arbeter is chief technical analyst for Standard & Poor's

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