MARKET STALLS AT SOME RESISTANCE LINES
John J. Murphy
NASDAQ STALLING AT JANUARY HIGH... Although the market has shown some improvement of late, we have to point out that some stock indexes are stalled at chart resistance points defined by previous peaks and/or trendlines. The Nasdaq fits into the former category. Chart 1 shows that the Nasdaq Composite has reached the previous peak formed during January -- and is backing off from it. That in itself shouldn't be too surprising. Markets usually pause at a previous peak. But it does represent another test for an index that looks like it's trying to move higher. The Nasdaq has to get through that initial chart barrier to break it out of its current trading rangen. It wasn't able to do it this week. The RSI and daily stochastic lines also reflect overbought conditions, which probably stalled the advance as well. The lowest line on the chart is the on balance volume (OBV) line for the Nasdaq. That helps us to see the strength of volume flows. So far, the OBV has been lagging behind the price action, which suggests that upside volume hasn't been keeping pace with Nasdaq price gains.


Chart 1

NYSE INDEX STALLED AT DOWN TRENDLINE... Chart 2 plots the NYSE Composite Index to include the sideways trading range that started with the bottom formed last July. The trendlne drawn under the July/October lows was retested during March and held. As the chart shows, however, the resistance line drawn over the August/December/January highs is now being tested. The fact that the line has already been touched three times gives it more validity. That's why we're showing it. The daily RSI and stochastic lines are weakening a bit from overbought territory, which also explains some short-term selling. Here again, if the NYSE Index is going to move back to the top of its nine-month trading range, it's going to have get through that trendline first. It couldn't do it this week.


Chart 2

BANKS RUN INTO CHART WALL... Bank stocks have been one of the strongest market groups during the recent rally. The Philly Bank Index, however, has already reached the 800 level, which was the same level that turned back rallies during August, November, and January. In other words, it's a formidable resistance barrier. When a leading group runs into a resistance wall and starts to weaken, that usually has a dampening effect on the rest of the market. We suspect that was part of this week's market problem.


Chart 3

WEAK ECONOMIC NEWS PUSH BOND YIELDS AND DOLLAR LOWER... This morning's GDP report came in much weaker than expected -- on the heels of a weak jobs report on Thursday. This week's disappointing economic numbers probably account for the downturn in bond yields. The 10-year T-note yield wasn't able to get through its (red) 200-day moving average -- and is in danger of falling below its (blue) 50-day average. We've pointed out several times that bond yields and stock prices have been positively correlated throughout the entire three-year bear market in stocks. In a perverse sense, rising interest rates are needed to signal a strengthening economy -- which is needed to support a stronger stock market. When rates start to fall again -- as they did this week -- that implies that the economy isn't getting any better. That in turn is keeping a cap on stocks. The U.S. dollar, which had rebounded along with stocks, is retesting its recent lows. New selling in the greenback may be another symptom that economic optimism is slipping as well.


Chart 4


Chart 5


April 29, 2003

John J. Murphy, CNBC-TV's technical analyst for many years, and Greg Morris offer money managment and market services at MURPHYMORRIS.COM , email address orders@murphymorris.com .

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