The Market Catches Its Breath

Once the current minor pullback runs its course, the major indexes should be in good shape to run higher once again

By Mark Arbeter

The stock market took a much-needed breather last week following the recent strong advance. The S&P 500 advanced 5.4% from Mar. 24 until Apr. 5 while the Nasdaq was up 9.3% from Mar. 23 until Apr. 5. These were the strongest multi-day (9-day) advances for the Nasdaq and the S&P 500 (8-day) since June, 2003.

We believe that the inability of the market to continue its upward trek last week was technical in nature. First, the major indexes had moved into fairly overbought conditions on a short-term basis. Secondly, the indexes moved into pretty good areas of short-term chart resistance. With the disappointing reaction on Thursday, Apr. 8, to some positive corporate as well as economic news, it appears that there will be some additional downside action. However, the pullback is expected to be shallow on a price basis and limited from a time perspective.

The S&P 500 ran up into a concentrated area of chart resistance between 1,140 and 1,160. There are many support areas just under the current level of the "500", beginning with trendline support at 1,130. The 20-day exponential moving average is at 1,128, the 50-day exponential moving average lies at 1,126, with chart support at 1,124. Also, the middle Bollinger Band or 20-day simple moving average comes in at 1,118. These areas of support should contain the index during the short-term pullback.

The Nasdaq moved up to chart resistance that runs from 2,035 to 2,090. Support for the index, which includes both a trendline and the 50-day moving average, come in around 2,018. There is good chart support at 1,990, and the 20-day moving average comes in at 1,979.

Since the Nasdaq bottomed out on Mar. 23, it has outperformed the S&P 500. The fact that funds are flowing back into the growth areas of the market and out of the more conservative areas is a positive from our perspective. During the market's run from the major low in October, 2002, the Nasdaq led the way, so it is important that this growth leadership emerges once again.

Also, since the short-term low in late March, market internals have improved quite a bit. There has been a nice pick-up in 52-week highs on both the NYSE and the Nasdaq. Volume breadth models on both indexes have moved back to bullish configurations. The 10-day ratio of advancing volume vs. declining volume, an indicator that has been discussed here of late, exploded recently, rising to almost 4.1. This is the highest level this ratio has achieved since back in April, 2001.

Looking at this indicator during bull markets, it has historically exploded higher at the beginning of advances, hitting its peak early in an intermediate-term uptrend, and then slowly deteriorating as the rise matures.

Following the plunge in Treasury prices on Friday, Apr. 2, the market stabilized last week, showing little net change in yields. The technical explanation for the pause in the benchmark 10-year Treasury note is simply that the yield ran up to very important trendline support in the 4.21% area. This downward sloping, bullish trendline on the yield chart is drawn off the secondary peak in yields last September, and has contained yields ever since.

This was the third successful test of this trendline and therefore, it has very important implications for future movements in Treasury yields. The 10-year Treasury yield chart has traced out a well-defined, downward-sloping channel with support near 4.2% and resistance down near 3.6%.

Looking at a longer-term chart, the market also ran into trendline support drawn off the yield peak way back in January, 2000, and the subsequent peak in March, 2002. Basically, this longer-term trendline almost fits right on top of the shorter-term trendline discussed above. So, if the 10-year yield breaks above this trendline, a 4-year downtrend in yields will come to an end and this is obviously significant to the Treasury market.

We still believe that once the minor pullback runs its course, the major indexes should be in good shape to run back up and challenge their respective recovery highs during the next month or so. This would put the indexes in good shape for a move to new recovery highs over the summer months.

Arbeter, a chartered market technician, is chief technical analyst for Standard & Poor's

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