The stock market marches on, not higher or lower, but sideways. Like a Superball in a small room, the market is producing rapid movements that just don’t last. This, we believe, is what a reversal pattern looks like, but it certainly doesn’t feel very good. It surely isn’t easy to predict on a day to day basis either. Technically, it’s a battle between the forces of supply and demand, bears vs. bulls, Ali vs. Frazier, you get the picture.
As we talked about last week, the foreign markets were all basing and facing stiff overhead resistance that is acting like a ceiling on the indexes. The same can definitely be said about the major indexes in the U.S. Last week, they all seemed to run into major oversupply at the same time, and it almost didn’t matter how strong the environment was for stocks, a breakout was just not in the cards with all that weight sitting on prices.
The S&P 500 got as high as 1387 during the recent rally, which was very close to the intraday high from the prior rally at the end of February. The index also moved into a thick layer of chart resistance we have been taking about between 1380 and 1410. With the market short-term overbought when it reached this zone of resistance, the "500" needed to back up and recharge its motor. Besides this zone of chart resistance, the index ran right into the declining 80-day simple average, and this was the first attempt to breech this average since the rally started. Many times, an index will back off a key moving average after an initial attempt to take it out. In addition, the S&P 500 bumped up against a key Fibonacci retracement of 38.2% of the decline at the 1385 level.
On the downside, the last big day of accumulation and heavy volume started down at the 1329 level and ran all the way to 1370, so we are back into what we believe is a pretty good support zone. The recent low from the end of March sits at 1315, and we would prefer if that level was not taken out, as it would erase the current series of higher highs and higher lows. While we thought the S&P 500 was working on a bullish double bottom reversal formation, be it, a very complex double bottom, it is also possible that the index is tracing out a bullish, inverse head-and-shoulders (H&S) bottom. This can be seen more clearly if we convert our candlesticks to a line chart. The left shoulder was formed in January, the head in March, and it is certainly possible that the "500" is now working on the left shoulder. Whatever it turns out to be, it is a very complex pattern and not as nearly clean and fluid as many of the recent lows. This is of course due to the damage that has been incurred by the major indices and many individual stocks. It takes time to repair the technical damage, and this plays out in both volatility and time.
The Dow Jones industrials is in the same predicament as the "500," as its chart formation is very similar and it also ran into heavy overhead resistance last week and early this week. The intraday high of the rally was 12,734, right near the prior peak at the end of February at 12,757, and the prior peak at the beginning of February at 12,768. These peaks correspond very closely with the closing lows in November and August at 12743 and 12846, respectively. Like the "500," the DJIA also ran smack into its declining 80-day simple average, as well as a 38.2% retracement of the decline at 12,666.
The Nasdaq’s chart is somewhat different than the "500" and the DJIA, but it also ran into overhead supply from its recent highs. The difference in the charts is primarily because the Nasdaq’s November low was well above its August low and, therefore, potential chart supply is a little more spread out. The Nasdaq’s close last Friday was 2371, right near the mid-February high, and in a range of short-term chart resistance that runs up to 2420. This resistance was formed from the major reversal and heavy volume day on August 16, and the price range that day was 2387 up to 2462. The Nasdaq also advanced right up to its 80-day simple average before rolling over. The index also appears to be working on a potential, inverse H&S pattern.
Moving over to the smaller stocks, we basically see the same patterns as the S&P and the DJIA. The S&P MidCap 400 has rallied up to heavy overhead supply in the 820 area three times since February 1 and failed each time. This chart resistance is from the key pivot low in August and November. The MidCap was able to recapture its 80-day average, which is something the "500" and the DJIA have not yet done. The "400" ran out of gas at its 150-day exponential average, which is considered more important from a long-term perspective. The index has retraced about 50% of its October to January decline, a little more than the blue chip indexes.
The S&P SmallCap 600 has bounced off of the 340 level twice, setting up the potential for a complex double bottom. It is also possible that the "600" is tracing out an inverse H&S. Like the other indices, it has struggled to break above major chart resistance which for the small caps is up at 383. This level was the pivot low in November and December. Chart resistance from the August lows starts just above there at 387. As chance would have it, the 383 zone also represents the key Fibonacci retracement of 38.2% of the October to March bear market in the small caps.
So we hate to sound like a broken record, but until all this overhead supply can be eaten through, the stock market is likely to be stuck in the spring mud. We will hold our breath as the "500" tests critical support levels in the lower third of the recent price range, and we hope the latter part of this spring brings better weather and a healthier stock market.