A Time for Caution

The stock market has shown some real deterioration in recent sessions

By Mark Arbeter

The stock market showed some real deterioration last week, with the major indexes moving toward the bottom of their intermediate-term trading ranges. During the sell-off, volume levels rose to pretty healthy levels, a clear sign that some caution is warranted.

NYSE volume on both Wednesday and Thursday was among the highest levels so far this year. Volume both days came in around 186 million shares, well above the 50-day exponential moving average of 148 million shares. The volume and price action last week wipes out the rally attempt from last Thursday and puts the market in danger of undercutting the recent market lows.

Another negative is that volume levels are heavier during this move lower than they were during the reaction low in March. Ideally during a test, volume levels should contract vs. the first pass lower, showing a contraction in selling pressure. What we are seeing is the opposite, which is not a positive sign.

Volume on the Nasdaq was also heavy during the week, spiking on Thursday to almost 2.4 billion shares. This was the highest level of trading on the Nasdaq since January and was well above the 50-day exponential moving average of about 1.9 billion shares. This increase in volume to the downside is a clear indication that institutions have stepped up their selling and many times this type of activity precedes additional price weakness.

The S&P 500 broke back below its 50-day exponential moving average this week and is now sitting on the top of minor trendline support drawn off the November, 2003, and March, 2004, lows. The 150-day exponential moving average lies at 1,095 with critical chart support form the March lows just below that at 1,090. If the S&P 500 breaks strongly below the March low, it would most likely lead to a decline to the 1,000 to 1,050 area. There is good chart support in this area and an important Fibonacci retracement of 38.2% of the March, 2003, to January, 2004, highs targets the 1,021 level.

The Nasdaq also sliced right through its 50-day moving average and is very close to testing the March lows down at 1,900. The Nasdaq broke below its lower Bollinger Band and had a minor break of its 200-day moving average at 1,933. The index has been above its 200-day since last March. A break of the March lows would then target the 1,700 to low 1,800 zone. A 38.2% retracement of the March, 2003, to January, 2004, advance comes in at 1,817 and a 50% retracement lies at 1,713. There is also chart support in this zone.

One concern for the Nasdaq is the lack of leadership among high growth stocks as well as the failure of some recent breakouts. Another worry for the Nasdaq is the action of the semiconductor stocks. The Philadelphia Semiconductor Index (SOX.X ) broke below its March low on Thursday, Apr. 29, on heavy volume. With the index near 445, it is sitting right at Fibonacci support of 38.2%. More substantial Fibo support (50% retracement) as well as chart support comes in down near the 400 area, so more downside is certainly possible for this group.

Daily momentum indicators have turned negative of late with the weekly momentum indicators remaining negative, and the monthlies in neutral to positive configurations. This mixed to negative momentum picture basically matches the lack of long-term commitments we are seeing by institutions of late. The best time to be in the market is when all the momentum indicators are in agreement.

The bond market continued its woes last week, seeing yields move higher once again. The 10-year Treasury note rose to its highest yield since August of last year, finishing the week near 4.5%. The 10-year is now in a critical area of chart support that runs from 4.5% to 4.7%.

We do see the possibility of a short-term rally in bonds, as they are extremely oversold. However, we continue to believe the long-term trend in bonds is slowing turning negative and see higher yields as we move through the year. Intermediate- and long-term momentum models are negative and we think the stock market is not likely to get any more assistance from bonds in the future.

Higher rates usually equate to a strong dollar and that is what has happened. The U.S. dollar index has put in at least an intermediate-term low and is know challenging major trendline resistance up in the 91-92 area. This trendline resistance, drawn off the peak in 2002, and a line that has contained the dollar ever since, is extremely important. If taken out, the longer-term trend of the dollar would turn neutral from negative. As the dollar has climbed, gold has suffered. The metal broke out of a 3-month consolidation with the next potential support area down near $370.

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

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