Has the Bear Been Beaten Back?

The market should at least attempt a move back to its August highs. But more basing action will be needed to repair the damage

By Mark Arbeter

The S&P 500, which had been on a real tear since bottoming out on Oct. 10, hit the brakes hard last week after running up to the 900 level. While intraday pullbacks were supported by the 50-day exponential moving average during the week, there was a noticeable pickup in trading volume when prices headed south on Thursday. Until we see further evidence of distribution - widespread selling by institutions -- we will give the market the benefit of the doubt and believe further gains are likely.

Important chart support for the S&P 500 is in the 841 to 881 area. A 50% retracement of the latest rally, also a support area, comes in just below chart support at 835. Initial chart resistance runs from 900 to 920. At this point, the most critical resistance level is up at 963 or the recent high in August. The potential double bottom reversal formation will not be complete until this interim high is taken out on a closing basis.

This level is also important because it represented the low zone during the September, 2001 bottom. So a breakout above the 963 area will reverse the nasty two-year downtrend of lower lows and lower highs. However, to break the downward sloping trendline that has contained prices for two years, and officially call an end to the bear market, the 1050 level will have to be taken out.

So far, the rally is lacking any clear leadership. So many stocks, large and small, are in such terrible shape technically, that we continue to believe more basing action will be needed to repair the damage. There are few sectors, or for that matter, individual stocks with favorable chart patterns. While this is quite understandable following the depth of the bear market, patience is required as chart patterns mend themselves.

Just one look at the many large caps that make up the majority of the major indexes and it is clear that some have not completed a basing pattern, while many others have a huge amount of supply overhead. We prefer stocks that are breaking out to new highs on heavy volume and there are few to pick from.

Our up/down models on both the NYSE and the Nasdaq remain in bullish configurations. This shows that institutions continue to participate in the market on the long side, and this is critical to the intermediate-term success of the market. The action on a micro basis (intraday) continues to be bullish as there are many days when the market opens lower but finishes higher. There have also been a couple days recently when the economic news and/or the corporate news has been less than favorable, but the market has been able to withstand it and move higher. Remember, a bull market will start when the majority of news is negative, and a bear market begins when the preponderance of news is positive.

Sentiment is beginning to back off its very oversold condition but there does not seem to be a big swing back to the bullish camp. CBOE put/call ratios remain high while short-term sentiment polls are still tilted towards the bearish camp. There was a big shift in the Investors Intelligence poll as bulls increased from 28.4% to 38.9% and bears fell from 43.2% to 35.6%. While the absolute percentages do not raise a yellow flag, a continued increase in bullishness will bear watching.

During the bear market, any time the market has rallied, sentiment has moved much too quickly to the bullish camp. When this finally stops happening, and it is amazing that it does considering the bloodbath that many have suffered, then we will feel much more constructive towards the market.

For the near-term, the path of least resistance is higher and the market should at least attempt a move back to its August highs over the next month. How the market deals with these highs will determine whether the bear has been put to sleep or is just taking a break.

Arbeter is chief technical analyst for Standard & Poor's

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