Less Pain, More Gains Ahead?

Recent price and volume strength signals that the market's recent lows will hold in the near-term

By Mark Arbeter

The market's action late last week was certainly impressive and suggests higher prices over the short-term. The intraday rebound Wednesday, Mar. 12, just as the S&P 500 and the DJIA were approaching critical support areas seen at the October low, and the huge rally on Thursday, imply that the latest price test was a success. Along with the impressive reversal in price, volume rose sharply from recent levels, confirming the price advance.

The S&P 500 traded as low as 788.94 last week, coming very close to the closing low on Oct. 9 of 776.76 and the closing low on July 23 of 797.70. The turnaround last week was markedly different relative to recent reversals in February, because it occurred on much heavier than average volume. In fact, the volume on the NYSE and the Nasdaq on Thursday was the heaviest in almost three months.

This combination of price and volume strength gives us more confidence that at least a tradeable rally has started and that the recent lows will hold in the near-term.

Another positive development was the fact that the S&P 500 and the Nasdaq held above trendline support, indicating that a stronger market tone was taking hold. In other words, the indexes failed to move all the way down to the bearish sloping trendline that one would have expected if the current downtrend were in force. There were also some positive divergences between price and volume over the last month. Prices fell to new lows this week while many technical indicators held above their recent lows.

One of the most important bullish signs that the market has demonstrated of late involves new 52-week lows. While the S&P and the DJIA were testing their October and July lows, the ratio of new NYSE lows to issues traded has shrunk on each price test. In July, NYSE Lows/Issues Traded peaked at an extreme level of 26.7%. During the market bottom in October, the percentage of new lows on the NYSE fell to 17.8%. During the latest price test this week, new lows were only 9.3% of issues traded.

This dramatic contraction in new 52-week lows suggests that the broader market is strengthening even while the indexes continue to test the same levels. In other words, chart patterns are improving as the current base plays itself out.

While we believe that the market has found at least a short-term bottom, plenty of overhead resistance awaits the major indexes. The S&P 500 has a small amount of chart resistance from 830 to 850, which should not be too much of a problem. However, major chart resistance begins in the 870 to 875 zone and stretches all the way up to the 965 level or the high back in August. This area of chart supply will be formidable and will need to be dealt with to finally put the bear to rest. The major bearish market trendline, drawn off the September, 2000, and March, 2002 highs, also comes in near 965.

Sentiment, for the most part, continues to give off bullish readings. The combination of the Consensus poll and the MarketVane poll has remained below 55% bulls for the last four weeks. Low levels of bullishness in these two polls have preceded many short if not intermediate term advances. Investor's Intelligence poll of newsletter writers is showing 39.8% bulls and 37.5% bears. This is the first time since October that bulls have fallen below 40% and the bearish levels seen over the past two weeks is the highest since October. However, we normally see more bears than bulls on this poll at a major bottom, so we still don't believe that the market is out of the woods on a longer-term basis.

Data from NYSE members is also giving off bullish readings. The Specialists/Public Short Selling ratio as well as the NYSE Members/Public Short Selling ratio is at very low levels that have been associated with market bottoms. These relationships basically compare what the "smart" money on the floor is doing relative to the "not so smart" money of the general public. The last times that these ratios have been so low or bullish was near the market lows in July and October.

While it certainly doesn't feel like the market could take off with all the uncertainty, stocks have had almost every excuse to break lower in a big way and have held. When the market ignores bad news, this is usually a great indication that a decent rally is about to occur.

Arbeter is chief technical analyst for Standard & Poor's

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