A Tough Road Higher for the Nasdaq

The index could face some formidable resistance as it attempts to catch up to other major benchmarks

By Mark Arbeter

Some buying late last week propelled the Nasdaq to a minor breakout, as the index played catch-up with its blue chip counterparts. The Nasdaq is attempting to move back into the trading range that existed earlier in the year, but in our opinion, faces some major hurdles just overhead.

The technology-heavy index bounced back above its 50-day exponential moving average, after trading below this key moving average since the beginning of July. Trading volume on Thursday, Sept. 9, was the heaviest the Nasdaq has posted since Aug. 11 and was well above its 50-day average, however volume was not that impressive relative to its 100-day average. The low trading volume in August brought the 50-day average down to 1.48 billion from around 1.7 billion in July.

The resistance overhead could be formidable in our opinion, with heavy chart resistance beginning in the 1,900 area and running all the way up to 2,150. A 50% retracement of the decline from the end of June until the recent low in mid-August also lies at 1,900 and a 50% retracement of the total decline since Jan. 26 comes in at 1,953. The 200-day exponential moving average is at 1,905 and the 200-day simple moving average is up at 1,968. Trendline resistance, drawn off the peaks in January, April, and June is up near 1,925.

Historically, major market bottoms are accompanied by both robust price and volume action. As we have said, volume for the most part has been below average during the current advance. The strength of the rally when focusing on price has also lacked real intensity. For instance, during the early stages of the March, 2003, rally, price momentum indicators quickly moved to extreme overbought readings. The 6-day relative strength index (RSI) jumped to over 80 while the 14-day RSI moved to 68. During the latest advance, the 6-day RSI on the Nasdaq moved to only 71 and the 14-day has only hit a high of 56. At the early stages of a potential, enduring advance, overbought readings are actually positive, and give clues to the potential durability of a rally.

The S&P 500 continues to trade in a wide area of chart resistance that runs from 1,090 up to 1,160. The index is currently in a very thick zone of chart resistance within this wider band, and that runs from 1,120 to 1,140. In our opinion, the chart pattern of the "500" remains more technically appealing than the Nasdaq, but the "500" continues to be in a formation of lower highs and lower lows, the basic definition of an intermediate-term downtrend. The index faces important trendline resistance up near 1,135. This trendline is drawn off the peaks in March and June, and has represented a ceiling for the S&P 500. The price peak in June of 1,144 also represents a key resistance zone for the index.

The "500"s daily chart has pushed some of its momentum indicators to minor overbought condition, but they are still lower than the rallies from this year and well below levels posted following major market lows. As we have commented recently, the breadth of the latest advance has been much stronger on the NYSE than the Nasdaq.

The NYSE advance/decline line remains in new recovery high territory, while the Nasdaq A/D line continues to trace out lower lows and lower highs, despite the recent strength. Along with these breadth statistics, the A/D line of the up/down volume has improved quite a bit, basically traveling sideways over the last four months while the A/D line of the Nasdaq's up/down volume continues to trace out a clear pattern of lower peaks and lower troughs.

Crude oil prices have pulled back fairly sharply, and have held at important support. The previous peak for oil back in early June was right around the $42 level. A 50% retracement of the latest advance also targeted the $42 area. Intermediate-term chart support lies just below the $40 level. With the recent pullback, the market has moved to an oversold condition on the daily charts. However, we suspect that the crude oil market will need to do some more backing and filling before the next strong rally will take place. The intermediate-and long-term trend of the oil market, in our opinion, is higher, and it will be interesting to see how the market deals with $50-plus crude, if that day comes.

The bond market looks toppy to us after a pretty large move since mid-June. The yield on the 10-year Treasury note has moved into an area of strong chart resistance between 3.9% and 4.25%. In addition, there is heavy trendline resistance in the 3.9% to 4% zone. A close above 4.4% would most likely indicate a trend change for bonds.

Required Disclosures

As of June 30, 2004, SPIAS/SPSI and their U.S. research analysts have recommended 35.9% of issuers with buy ratings, 52.7% with hold ratings and 11.4% with sell ratings.

5-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis. 4-STARS (Accumulate): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis. 3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis. 2-STARS (Avoid): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain. 1-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Price charts and required disclosures for all STARS-ranked companies can be found at www.spsecurities.com.

Other Disclosures

This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS") and is distributed in the U.S. by Standard & Poor's Securities, Inc. ("SPSI"), a registered broker-dealer, and a member of the New York Stock Exchange, Inc. and National Association of Securities Dealers, Inc. The research and analytical services performed by SPIAS are conducted separately from any other analytical activity of Standard & Poor's. No research analyst that prepares a research report on a subject company has a financial interest in or is associated with that subject company.


This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

Readers should note that opinions derived from technical analysis may differ from those of our fundamental recommendations.

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

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