Uptrend Remains Intact

But with price momentum on the wane -- and bullish sentiment still at extreme levels -- caution remains in order

By Mark Arbeter

The S&P 500 pulled back last week and held above key trendline support, suggesting that the trend remains bullish. However, with price momentum dissipating, as the "500" has basically gone sideways the last three weeks, and important support just underneath the market, it will be important for the bulls to make a stand in the near term.

The benchmark index has traded within a nice, well-defined channel since March, with trendline support at 970 and trendline resistance up at 1035. Near-term chart support lies between 970 and 975, or the most recent intraday and closing lows, with more important chart support at 950. The 50-day exponential moving average comes in at 953, and can also be considered support. Near-term chart resistance is at the most recent high of 1010 to 1015. Major chart resistance does not begin until the 1050 area.

As with previous pullbacks, volume has dropped off with prices, which is a positive. However, the latest rallies to new highs have also seen a drop in volume, and that is certainly a warning sign. Overall volume basically is starting to tail off and that is a function of seasonality.

As we get deeper and deeper into the summer months, volume really dries up and it will be harder for the market to move higher in a big way. This is one of the reasons that we believe that stocks could enter into a trading range over the next couple of months.

Along with the slide in volume, there has been some deterioration in some of our accumulation/distribution models, but not quite enough to suggest that a correction has arrived. For instance, the six-day summation of up vs. down volume on the Nasdaq has turned bearish, but has not been confirmed by the 10-day summation. Also, the advance/decline lines of up vs. down volume on both the NYSE and the Nasdaq have pulled back to important moving averages, but have not dropped through these averages and therefore have not turned bearish.

There has been a major breakdown in the number of new highs vs. new lows on both the NYSE and the Nasdaq. After spiking to levels not seen since 1997, the difference in new highs and new lows on both indexes have contracted quite a bit and are in danger of issuing sell signals for the first time since January. The reason for the deterioration in these high vs. low numbers has been due to a huge drop in the number of new highs on both the NYSE and the Nasdaq, not from a pickup in new lows.

This certainly is not a surprise, as many stocks have moved well off their most recent lows with many stocks breaking out to 52-week highs. The data on the new highs confirms that there has also been some weakening in the recent leaders, and this certainly has to be watched. When the leaders of a rally turn over, it's time to head for the sidelines in a hurry.

The latest sentiment data is still tilted heavily towards the bullish camp and that continues to imply that anything to the upside will be limited. Investor's Intelligence numbers remain frightening with 59.4% bulls and only 17.7% bears. Bullish sentiment from both the Consensus and MarketVane polls remains very high.

As we pointed out in the previous column, the last holdout in the sentiment equation was put/call ratios and they have finally declined to dangerous levels. CBOE put/call ratios are showing that option investors have become very bullish and that has pushed all the sentiment indicators we monitor to a bearish mode.

The 10-day exponential moving average of the CBOE put/call ratio recently fell to 0.65 -- the lowest level since November, 2001. The 30-day put/call ratio has fallen to 0.73, the lowest since March, 2002. Neither of these periods were good times to be in the market so caution is definitely warranted from a sentiment standpoint.

As always, it is wise to wait until the price breaks down and the trend turns before turning too bearish. The market could certainly regroup next week and attempt another run higher but at best we think the market could go sideways and at worst the market could be on borrowed time.

Arbeter is chief technical analyst for Standard & Poor's

Before it's here, it's on the Bloomberg Terminal.