A Show of Strength for Stocks
By Mark Arbeter
Once again, like they have since the major low they posted in March, the S&P 500 and the Nasdaq composite indexes pulled back to their respective 50-day exponential moving averages and bounced sharply. This continued pattern of finding support at the 50-day average is common during an intermediate-term advance and suggests additional new highs will be seen by the major indexes.
Both the S&P 500 and the Nasdaq have flattened out over the last couple of months as the indexes have run up to areas of major chart resistance. While the "500" is still in an intermediate-term uptrend, the current chart formation can best be described as a base on a base. This term does not get a lot of press but it is actually quite common. The first base occurred during the summer months and was confined by the 960 to 1,010 area. The current base for the S&P 500 is between 1,010 and 1,060.
Basically, because volume expands during advancing days and falls during declining days, institutions are leaving their footprints on the price chart. They are accumulating shares during this consolidation and that bodes well for future gains. A base on top of a base, which exhibits patterns of accumulation, is considered bullish and usually lead to further gains. However, any break below the bottom of the range or deterioration in accumulation patterns must be respected.
As we have reiterated, there are plenty areas of support right below the market and an abundance of resistance just above the market. The 50-day exponential moving average of the S&P 500 lies at 1,037 and a trendline drawn off the May low and August lows and tested in September and November is at 1,035. Near-term chart support comes in at the recent lows of 1,030 and 1,020. The 150-day exponential moving average is at 1,000 and the 200-day exponential moving average lies at 989. Intermediate-term chart support comes from the base or consolidation formed over the summer between 960 and 1,010.
The initial piece of resistance for the "500" is from the recent recovery high (closing and intraday) at 1,059 to 1,063.65. Believe it or not, a major Fibonacci retracement of 38.2% of the entire bear market comes in at 1,063.52 -- or right at the most recent intraday high. A move to recovery highs, which we expect in the near-term, will then face chart resistance beginning in the 1,075 to 1,080 area. This zone could be a fairly important resistance point because it represents the lows seen in March, 2001, and February, 2002. A major zone of chart resistance lies between 1,075- 1,177. Trendline resistance drawn off the January, 2003, and June, 2003, highs is at 1,115. A 50% retracement of the bear market comes in at 1,152.11.
The Nasdaq has chart support from the recent lows at 1,882 and 1,840. The 50-day exponential moving average is at 1,897 with trendline support at 1,893. Near-term chart resistance lies at the recent closing and intraday highs at 1,976 and 1,992. A 23.6% retracement of the bear market lies at 2,070 with trendline resistance from a line drawn off the July and September highs at 2,120. There is a wide zone of chart resistance between 1,950 and 2,300.
The trends in other markets remain in place with continued weakness in the U.S. Dollar index and strength in commodities. Gold prices pierced the $400 level during the week while the CRB Index recently hit the highest level since 1996. The 10-year Treasury note remains in a trading range, consolidating between 4% and 4.5%. We do expect yields to trend higher over the intermediate term and believe the 10-year note will exceed the yield highs seen in August of 4.6%.
We see the major indexes moving to new recovery highs over the near-term but believe there will be a decent pullback into the middle of December.
Arbeter, a chartered market technician, is chief technical analyst for Standard & Poor's