Caution Flags for the Markets
By Mark Arbeter
Last week, the stock market was basically flat despite a fair amount of daily volatility as neither the bulls nor the bears could take control of the market. The bond market continued its major reversal, in our opinion, and crude oil futures held up near $55 per barrel. We still believe the stock market is in the process of tracing out a short-term top and would remain cautious for the next couple of weeks.
We believe the Nasdaq is the first major index to show signs of a short-term technical breakdown. While the S&P 500 and the Dow Jones Industrials have traded in a sideways formation recently, the Nasdaq looks to us like it is rolling over. Because the Nasdaq has led the rally since the lows in April, we do expect the index to pull back more than the other indices.
As we have mentioned over the last couple of weeks, there is a brick wall at the 2100 level for the Nasdaq. The latest failure at that point was the fifth time this year, as the index was unable to break above that level in January, twice in February, March and now June. While the Nasdaq has run into formidable resistance overhead, there appears to be a solid floor underneath. Chart support lies in the 2020 level and represents the peak in index in April and the lows for the Nasdaq earlier in the year. There is a convergence of moving averages in the 2020 zone that is quite remarkable and somewhat rare.
The 50-day exponential, 80-day exponential, 200-day exponential, and the 200-day simple moving averages are packed extremely tight and all lie between 2014 and 2022. In addition, a 38.2% retracement of the advance since the intra-day low on Apr. 29 would target the 2018 level. The more pieces of resistance at one level, the more significant that area becomes.
A decline to the 2020 level would represent only a 4% pull back and, in our opinion, set the Nasdaq up for another run at 2100. We believe the next move higher will finally put 2100 to rest, placing the Nasdaq in position to challenge its cyclical, bull market peak up in the 2200 zone. One of the reasons for our short-term caution but intermediate-term optimism is the current configuration of momentum indicators. The daily stochastics indicator on the Nasdaq has rolled over from an extremely overbought condition, signaling that a pull back had arrived.
The daily MACD indicator has also rolled over and given a short-term sell signal as well. When looking out a bit, the weekly momentum indicators suggest to us that a continuation off the April lows may have further to run. The weekly MACD has given an intermediate-term buy signal recently, the first bullish signal since last September. The weekly stochastics is overbought but still has room to go before moving into extreme overbought territory. Many times, the stochastic indicator will trace out bearish divergences before an intermediate-term peak, and this indicator has yet to trace out its first peak.
The S&P 500 index has traded in a fairly tight range of 1184 and 1209 since May 19, and has run into an area of decent chart resistance up in the 1190 to 1225 zone. We see a very mild pullback for the S&P 500, as support levels are much closer than they are for the Nasdaq. Initial support comes from the 50-day exponential moving average at 1183, with the 80-day exponential average at 1181. The 150-day and 200-day exponential moving averages come in at 1175 and 1170 respectively. Trendline support lies at 1177 and 1164 with fairly good chart support in the 1175 area, in our opinion.
A 38.2% retracement of the advance from the April lows would target the 1181 level for the "500" while a 50% retracement would target 1172. Like the Nasdaq, there is a concentrated area of support, which is usually a positive for the market and gives us more confidence in making downside projections.
The bond market has reversed hard since June 3, and it appears to us that a firm bottom has been traced out for yields. Following the weaker-than-expected payroll report on June 3, the 10-year Treasury yield plunged to an intra-day low of 3.8%. Bonds quickly reversed and after the weakness on June 10, the 10-year yield was back up to 4.05%. There are a number of factors that suggest to us that yields could be headed higher over the intermediate term. First, the 10-year Treasury has had a fairly large move since peaking out at 4.7% on March 23. Second, both daily and weekly technicals were very overbought. Third, the 10-year moved to an area of strong chart resistance down in the 3.8% to 4% area.
Finally, sentiment towards bonds was also very overbought. The MarketVane poll is currently showing 76% bulls, the highest percentage of bullish sentiment since the major bottom in yields back in June 2003. During the middle of 2003, the 10-year fell to a multi-decade low near 3%. We project that yields on the 10-year could approach the 4.5% area over the next couple of months.
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In the U.S.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.8% of issuers with buy recommendations, 56.7% with hold recommendations and 12.5% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 29.2% of issuers with buy recommendations, 50.5% with hold recommendations and 20.3% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 34.3% of issuers with buy recommendations, 48.0% with hold recommendations and 17.7% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.2% with hold recommendations and 13.8% with sell recommendations.
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Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's