The Market Hits a Wall
By Mark Arbeter
A large stock market decline on June 23 erased all the hard-won gains from the last couple of weeks, and we believe this action puts the current uptrend in serious doubt. Crude oil prices surged to another record, hitting $60 per barrel. While oil was partially blamed for the large selloff, we believe the technical conditions of the stock market were also responsible for the weakness. While we have been calling for a short-term pullback, which finally may be here in our view, we do not see a great deal of downside.
The Nasdaq's battle with the 2100 level (See BW Online, 6/6/05, "The Nasdaq's Sticking Point") took another interesting turn last week. The index rose to 2106.57 on an intraday basis on June 23, the highest the index had been since Jan. 10. With the index looking like it was finally going to break out, in combination with a very strong showing in the semiconductor area, things looked very positive for the Nasdaq. At its high for the day, the Philadelphia Semiconductor Index (SOX) was up almost 3%, and was challenging its recent highs from February and December of last year.
However, with oil hitting another all-time high of $60, in conjunction with some poor corporate earnings reports and an overbought stock market, the Nasdaq and SOX index reversed sharply. The Nasdaq ended up falling back through 2100 on its way to 2071, a 1.7% decline from the intraday high. Semiconductor stocks dropped even harder, with the SOX index finishing down 2.5% from its intraday high.
The rejection at 2100 once again was a little more worrisome this time, in our view because it occurred on fairly high volume. The Nasdaq traded almost 2.1 billion shares, well above the 50-day average of 1.7 billion shares. In addition, and excluding the volume that occurred on June 17, which was a quarterly expiration, this was the highest Nasdaq volume since Apr. 29.
With the followthrough to the downside on Friday, the index broke below the latest closing low of 2060.18 and is now testing the intraday lows from June in the 2053 area. Additional support comes from the 50-day exponential moving average at 2041, and the 200-day exponential moving average down at 2020. Good chart support lies in the 2020 area and a 38.2% of the advance since late April targets the 2024 level.
The Nasdaq completed a double top formation on June 24 with a strong close below the recent low of 2060. The downside implications of a completed double top formation are based on the width of the pattern. The double top is 37.62 points wide and to come up with a downside target, this width is subtracted from the closing low of the formation, targeting the 2022 level. Like the 2100 area on the upside, there seems to be a plethora of support levels near 2020.
As we have reiterated many times of late, with the major indexes approaching strong chart resistance, in combination with an overbought condition with respect to price and internal data, as well as an increasingly bullish sentiment towards stocks, we believed that the indexes needed to correct some of their recent gains before busting out to new cyclical, bull market highs.
Daily momentum indicators such as the stochastics oscillator, MACD, and relative strength index had all moved to overbought conditions in late May, and have since rolled over and traced out negative divergences. Internal measures that moved to overbought levels included the 10-day ratio of down volume vs. up volume as well as the 5-day, 10-day and 20-day TRIN (an index combining both advance/decline and up-volume/down-volume indicators)data. The other concern for the Nasdaq has been the lack of robust volume levels as well as the lack of strong up/down volume figures.
Since about the middle of May, the S&P 500 has been grinding higher within the confines of a fairly narrow channel. On June 17, the index leaped out of this channel, only to roll over and fail. Many times, failed breakouts come all the way back to the other end of the pattern, which was at 1196. The index actually went right through that level on Friday.
Stepping back a bit, the S&P 500 has traced out a bearish wedge pattern over the last couple of months. A bearish wedge consists of two converging trend lines that are slanted upward. The apex of this pattern is slanted upwards at an angle. This is because prices edge steadily higher in a converging pattern, putting in higher highs and higher lows. A bearish signal occurred on June 23 when prices broke below the lower trendline.
Like the Nasdaq, there are many areas of support for the S&P 500 just underneath the index. The 50-day exponential moving average lies at 1191, the 150-day comes in at 1179, and both the 200-day exponential average and 200-day simple average are at 1173. Good chart support is found between 1160 and 1190.
In addition to this chart support, there is potential support from a heavy volume day that occurred on May 18. Heavy volume days that occur during a day when there is a wide price swing to the upside can act as both support and resistance, depending on whether the index is above or below the range for that day. In this instance, the S&P 500 is above the range of that day, which was 1174 to 1188. There was a lot of accumulation in this range and many times, the bulls will reenter the market at the same areas. The danger is if the S&P 500 closes below this range, because then the area becomes resistance.
Our confusion or interest about why oil was blamed for the end-of-week sell-off is due to the recent action of oil prices and the stock market. The S&P 500 posted its recent closing high on June 17, a day when crude oil closed at $58.40. The following day, the S&P traded sideways while crude oil reached $59.52 on an intraday basis. It took a move to $60, not far from the level seen on June 17 and 20, to finally push the stock market south. Since May 20, crude oil has risen from $47 to $60, and in that time, the S&P 500 continued to move higher. Maybe its round numbers that scare Wall Street or maybe it's something else.
Crude oil has run into trendline resistance, drawn off the recent highs, at $60, as well as psychological resistance at $60. A small pullback is certainly not out of the question, but we see prices continuing higher during the current advance. We think crude oil could ultimately climb to the mid-$60s zone during this move, before we see another meaningful correction. Long-term trendline resistance, drawn off the highs over the last couple of years, lies in the $66 area. In addition, weekly momentum indicators are a good distance from becoming overbought, and we think this gives the oil market more room to run on the upside.
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Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's