Stocks Wobble, but Don't Fall Down

Despite last week's selling, the Nasdaq never broke trend. The benefit of the doubt goes to the bulls

By Mark Arbeter

Stocks bent once again last week, but did not break. The market reminds us of a heavyweight prizefighter, taking blow after blow, perhaps enduring a standing 8-count, but never losing its feet. Until the bears can wrest control, the benefit of the doubt goes to the bulls.

The S&P 500 pulled back into a wide range of support between 960 and 1,010 early in the week, effectively erasing the breakout above that range. Technically, that is usually a negative sign. However, the leader of the current market advance, the Nasdaq never broke trend, indicating that a full-fledged correction was not in the cards.

The S&P 500 pulled back to the 996 level during the week, representing a fairly common 61.8% retracement of the advance from Aug. 6 to Sept. 18. The index also fell to minor chart support in the 990 area on an intraday basis. The rebound Wednesday was impressive on many fronts and catapulted the "500" back above its 50-day exponential moving average, after briefly undercutting this important support line.

There is massive support down in the 960 to 970 zone, which represented the index's lows in July and August. The 150-day and 200-day exponential moving averages also lie in this region. The 960 area also represents the top of the massive base that the "500" traced out between July, 2002, and May, 2003, so this level is significant.

The S&P 500 has minor chart resistance up at the recent high of 1,040. Once this level is taken out, chart resistance begins at 1,050 but does not get heavy until 1,070. There is heavy supply from that point all the way up to 1,175. This area should be formidable resistance for the market. A 50% retracement of the market's decline from the peak in 2000 to the low in October, 2002, comes in near 1,150. Trendline resistance comes in at 1,080.

During the week, the Nasdaq pulled back to a couple of key support levels and held very nicely. The index corrected right back to its 50-day exponential moving average on Tuesday and also held right at trendline support drawn off the March lows. The closing low on Tuesday of 1,787 was also in an area of minor chart support. The Nasdaq remains in an area of decent chart resistance that runs from 1,700 all the way up to 2330. A 23.6% retracement of the decline off the top in 2000 to the bottom in 2002 comes in at 2,070.

Market internals, which led us to some of our cautious comments of late, were very strong on Wednesday on the NYSE and fairly strong on the Nasdaq. More importantly, Friday's advancing volume, and market breadth on both the NYSE and the Nasdaq, were strong.

However, overall volume on Wednesday and Friday was not spectacular and is probably the one concern right now. There was certainly some distribution at the end of September that turned many of our internal models bearish. Interestingly, the last six-quarter ends have seen decent selling and this quarter was no different. We have no explanation for this weakness but it is pretty obvious on the charts.

The U.S. dollar index tested its June low of 92 and reversed nicely. The dollar is not out of the woods yet but could be putting in a bullish double bottom reversal pattern. There have been some positive divergences (higher technical indicator readings during the price test) on the weekly chart and this may suggest that the worst is over for the greenback. To turn the dollar trend to bullish, the index would have to see a close back above the 100 area. Just as a reminder, the dollar index has been in a severe decline since the middle of July, 2001. A stabilizing trend in the dollar would certainly be a plus for the stock market.

The other side to a stable or bullish move in the U.S. currency would most likely lead to weakness in gold prices. Gold's final low was in March, 2001, and the metal has been in a strong advance ever since. This move was a direct reaction to the weakness in the dollar. A potential turn in the dollar would also have negative implications for commodities and the Commodity Research Bureau (CRB) index. The final low for the CRB was in October, 2001, and the index has been in a nice rise ever since, also benefiting from the bear market in the dollar.

The 10-year Treasury note yield fell slightly below 4% last week and reversed sharply higher. There is a major zone of chart resistance for the 10-year note between 3.8% and 4.2%, so a reversal near 4% is not surprising and could be an indication that the note has put in a secondary low and that yields are headed higher from here. The decline in rates since mid-August retraced almost 50% of the rise in yield from June to August. Initial support for the 10-year comes in at the recent high yield in the 4.6% to 4.7% range. Beyond that, the 5% area should act as support.

Arbeter is chief technical analyst for Standard & Poor's

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