Moving Averages Indicate
Market's Growing Resilience
By ERIN SCHULTE
THE WALL STREET JOURNAL ONLINE
A palpable sense of optimism is budding among technical analysts on Wall Street, who say they see bullish signals emerging on their charts.
Although the equities rally lost steam at the end of last week, technicians who study the peaks and valleys of the market think its recent advances may help bolster investor confidence enough to lure new money into stocks. Even some staunchly bearish technicians changed their tune -- albeit cautiously and, in some cases, with time limits -- in response to several strong signals they see.
"Tuesday's sharp rally brought the stock market decisively above a key technical area -- the recent highs set on March 24 and April 7," said Andrew Burkly, technical analyst for Brown Brothers Harriman, who upgraded his near-term outlook for the market to neutral from bearish. "In our view, this constitutes an important technical breakout."
Broad indexes also have moved solidly above their 200-day moving averages -- the average of closing values over the last 200 trading days. To technicians, that's an indication that things are looking up, because once an index breaks through that level, it suggests new buyers are willing to pay more than recent average prices for the same stocks.
William P. Livesey, senior market analyst at CyberTrader, a unit of Schwab in Princeton, N.J., said the 200-day moving average for the Dow industrials is at about 8260. The S&P 500-stock index 200-day average sits at about 880, and the Nasdaq composite is at about 1360.
Major indexes are still well above those levels despite a pullback on Thursday and Friday. The Dow industrials closed Friday at 8306.35, while the S&P 500 was at 898.81 and the Nasdaq composite was at 1434.54.
While the breakthrough hasn't ignited a stampede to buy, Mr. Livesey thinks the overall mood is improving on Wall Street. "It's not an all systems go sign," says Mr. Livesey. "It's more an intermediate sign that things have turned around … The worst is behind us."
Gail Dudack, chief investment officer at SunGard, has long maintained that stocks will retest, and perhaps fall through, last October's lows. While she still believes this to be the case, she admits the tone is improving.
"We do see positive developments in individual chart patters, yet the macro technical and fundamental picture still looks poor. This is normal for a market in transition and it could be an early cue of the better market environment expected for the second half of the year," she wrote in a research note.
Ms. Dudack also mentioned the importance of 200-day moving averages for the major indexes, and said if the S&P 500 and the Dow industrials could hold above the averages in future pullbacks it would be an upbeat indicator of things to come. In addition to the indexes, more than 60% of the S&P 500's components are trading above their 200-day averages, she said.
And yet, bullish signals are being muddled by the lack of volatility and volume in the stock market.
While analysts note that volume is higher on "up" days than on "down" days on Wall Street -- indicating that buying is more enthusiastic than selling -- overall volume remains rather subdued, with many investors still on the sidelines.
Meanwhile, many point out that volatility remains low, indicating a high level of complacency -- often a harbinger of a pullback. When investors are feeling complacent, any bad news throws them for a loop.
The Chicago Board Options Exchange volatility index, or VIX, otherwise known as the "fear index," stood at 23.90 on Friday. Levels below 20 indicate a high level of complacency, while a number above 40 indicates high levels of fear and often accompanies market bottoms, when popular sentiment is still very bearish but buying opportunities abound.
Even more troublesome, the Nasdaq volatility index is at its lowest level since 1998.
While some say the VIX reading raises questions about whether the market can go much higher, others say VIX only poses a problem if it drops below 20, and is accompanied by a solid rally.
"If we go toward 8800 and the VIX gets down to 20, then we are set up for a serious correction," says Art Huprich, technical analyst at Raymond James. "By the time you get up to that price level, everybody on CNBC will be positive, and the amount of buying interest demand has already been put to work. Once the buying enthusiasm starts slowing down, people will take profits."
Breaking through certain levels of "resistance" -- or places where indexes or individual issues have neared before but never broken -- is also good news. It shows that buyers have more conviction than sellers, that investors would rather hang on to their stocks in anticipation of further gains than take profits in the expectation of a pullback.
Looking ahead, Mr. Livesey says he's keeping an eye on resistance levels for the Nasdaq composite, since the index has both risen and fallen before other major indexes in the past six years.
"The real key number to watch for the Nasdaq now is the Dec. 2, 2002 [intraday] high of 1521," he says. "Breaking this high would be a clear signal that the three-year bear market is over and that the October lows were cyclical lows. These technical benchmarks suggest a higher market this and next year."
He added that if the Nasdaq broke through the December high, the Dow industrials and S&P 500 would likely follow suit within a few weeks.
Many analysts and strategists have pointed to a 965 ceiling for the S&P 500 as a key level to watch. If buyers can push the broad index above that number -- a level which the index has approached but not breached since mid-2002 -- it would scare the bears into covering their short positions and could cause a robust rally, finally allowing major indexes to break out of trading ranges that have restrained the market for years.
Richard Cripps, chief market strategist at Legg Mason Wood Walker, says that short positions in the equities market are about 50% higher than they were in 2000, and that that level of short positions could fuel a big rally.
Brown Brothers Harriman's Mr. Burkly thinks breaking through the target could solidify the ebullient mood on Wall Street.
"If we take out that nine-month trading range at 965, that could point us up north of 1100 on a price target. You're going to see a lot of new longs come in and a lot of shorts covering at that point," Mr. Burkly said. "It's like a nine-month pregnancy, and if this occurs, you have a new baby bull." |
