A Struggle for Stocks

Recent trading has been a real tug of war between the bulls and the bears. So far, no one is winning

By Mark Arbeter

The stock market rode a roller coaster last week, surging on Monday, retracing those gains during the middle of the week, and then jumping higher on Friday. Technically, the indexes are back up near a fair amount of overhead supply that we believe will be tough to break. The lows posted over the last couple of weeks have held up so far but given the high number of negative looking intermediate- to long-term charts, we remain cautious on the equity market.

During last week, the S&P 500 index seemed like a rubber ball in a three-foot room. Looking back towards the early part of October, the index has been confined to the 1170 to 1200 zone. It has been a real tug of war between the bulls and the bears and at this point, no one is winning.

As far as overhead supply, there is decent chart resistance in the 1190 to 1210 area. There is a whole host of important moving averages that sit right on top of the market, and in our view, are creating a ceiling on the S&P 500. The 200-day exponential moving average lies at 1196, the 200-day simple comes in at 1199, the 150-day exponential average is at 1202, the 50-day exponential is at 1205, and the 80-day exponential moving average lies at 1207.

In addition to the chart resistance and moving average resistance, there is a plethora of trendlines overhead. The trendline drawn off the most recent highs as well as the trendline drawn off the June, August and September lows both lie at 1217. The trendline off the August, 2004, and April, 2005, lows comes in at 1200.

We think that the S&P 500, from a longer-term perspective, has completed a bearish rising wedge formation and the implications of this is a complete retracement back to the lowest part of the formation, which is down at 1060. There have been two major breaks of long-term trendlines drawn off the March, 2003, lows. One of these trendlines touched of the 2003 lows connected up to the lows in August, 2004, while the other trendline was drawn off the April, 2005, low. After the first trendline was broken back in April, 2005, the market tested the underside of the trendline before rolling over. A similar situation could occur with the second trendline providing resistance before the market rolls over again.

Major cycle lows that are projected over the next three to 12 months could also provide pressure on the stock market, in our view. The 39-week cycle low is forecasting a bottom at the end of February or the beginning of March. This cycle has been pretty good at targeting major lows of late, bottoming at near the lows in April, 2005, August, 2004, March, 2003, July, 2002, and September, 2001. The 78-week cycle is also targeting a major low in the first quarter of 2006. In addition, the four-year cycle, which has also been very accurate in predicting major market lows, is due to bottom in the fall of 2006.

The Nasdaq has also bounced around quite a bit of late, confined to a range of 2025 and 2120 for much of October. Like the S&P 500, the Nasdaq faces some decent hurdles overhead in our view. Chart resistance lies between 2100 and 2160. The 150-day exponential moving average comes in at 2095, and both the 50-day and 80-day exponential averages sit at 2110. Trendline resistance, drawn off the most recent peaks in August, September and October, is at 2135. Intermediate-term trendline support comes in at 2040 with chart support between 2000 and 2030.

Sentiment in the options market is all over the place, in our opinion, and so it is a difficult read right now. CBOE put/call ratios are very high, suggesting a high level of fear in the options market. This has often been bullish for the stock market over the years. The one potential negative with the current trend of rising put/call ratios from a longer-term perspective is that the action is typically more indicative of a bear market and not a bull market. During bull markets, put/call ratios tend to trend lower, while during bear markets, put/calls tend to trend higher. Both the OEX put/call ratio and the equity-only put/call ratio are suggesting that the market has further to go on the downside, in our opinion.

The Treasury bond market had a significant week, in our view, and it looks like the trend in interest rates remains firmly higher. The 10-year Treasury yield broke out above what we view is very important trendline support, and the yield appears headed for the next layer of support up in the 4.7% to 4.9% area. The 10-year gapped through long-term trendline support drawn off the May, 2004, and March, 2005, yield highs. This suggests to us that the trend since May, 2004, of lower yield highs and lower yield lows has been reversed and that a new trend of higher yield highs and higher yield lows is emerging.

Short rates also continue their consistent climb higher, suggesting no relief from the Fed in our view. The 1-year treasury has been steadily climbing since March 2004 and is now at its highest level since March 2001. The 1-year has risen from about 1% to over 4% over the last year and a half. We believe the combination of rising short and long-term rates, if they continue, will put a lid on stocks and potentially send the market lower over the next 3 to 12 months.

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

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