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This column was originally published on RealMoney on Sept. 11 at 2:10 p.m. EDT. It's being republished as a bonus for readers.

This is a tough market to trade, but you already knew that.

The growing conflict between the major indices defies easy opinions, no matter how much we try to compress our analysis.

The bottom line: They're engaged in an epic battle that will ultimately determine fourth-quarter direction.

The first week of September stopped the August rally dead in its tracks, and we are heading into the quarterly triple-witching day scratching our heads about the tape.


S&P 500

continues to outperform and is now within striking distance of the 2006 lows, but the


limp appearance is raising red flags in this seasonally unfavorable time of year.

Many stocks fell out of the gate after Labor Day and failed to recover into Friday's closing bell.

Market players understand the anniversary of the Sept. 11 attacks is likely to be a short-term roadblock that will pass quickly.

The question is, will buyers return once the calendar flips to a less troubling date?

Unfortunately, last week's reversal suggests there will be more confusion and doubt as we head toward the fourth quarter.

Triple-witching expiration is rarely kind to either side of the market, so a clarifying trend isn't likely until we get closer to month's end.

In the meantime, this bipolar environment tells us to play defense and manage our positions with tight stops.

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There was one major warning sign in last week's price action.

On Tuesday, the

Nasdaq 100 Trust


rallied above its 200-day exponential moving average and closed high in the daily range, but the exchange-traded fund gapped through this moving average Wednesday morning and stayed under the key level for the rest of the week.

This is an obvious failure signal that shows rejection at long-term resistance. However, it's still not time for short-sellers to reload their positions. Last week's reversal tells interested parties to pay close attention the next time the Nasdaq 100 moves up to test this level. Another rejection might yield a powerful downside thrust.

In any case, the market is unlikely to break out to higher prices this year as long as blue chips lead the recovery process. The three-year bull market has been highly dependent on the speculative fever found in technology and small-cap stocks.

While both of these groups have bounced off their summer lows, neither shows major leadership right now.

The outlook would change significantly if the

iShares Russell 2000 Index Fund

(IWM) - Get iShares Russell 2000 ETF Report

were to rally above base resistance at $73.50, but nothing on the daily chart suggests that's going to happen any time soon.

In fact, the sideways pattern it began four months ago could persist through the end of this year.

Are we building a topping pattern that will ultimately define the bull advance since 2002? The weekly chart for the Nasdaq 100 supports this bearish view.

Notice how the instrument rolled over at the post-Sept. 11 recovery highs printed in December 2001 and has dropped to late 2004 levels. A wise trader would say look out below.

The battle between tech stocks, small-caps and blue chips may take the rest of this year to resolve. The good news is that the macro environment has improved incrementally since early summer. This stability has finally lowered the emotional fires and yielded turnover action that could support higher prices sooner or later. But the jury is still out.

Will declining oil prices help the bulls' cause?

Regrettably, we don't really know how rising energy costs have affected stock indices in recent years.

We do know that bull markets in oil and gas stocks have inflated the S&P 500 since 2003 while the same forces have undermined growth in most other sectors. Perhaps these opposing forces actually cancelled each other out.

More importantly, the pullback in energy prices could be short-lived. The summer driving season is over and we're grinding through the quiet period ahead of winter heating demand. While world politics drove oil prices over the summer, short- and long-term weather forecasts will drive these markets from now through February.

Notice how crude oil prices declined sharply in the fourth quarters of 2004 and 2005, but then snapped back to new highs. It's likely that the same scenario is unfolding this year.

Also consider that light sweet crude is now approaching support at a three-year trend line. Rest assured that energy traders see this level as an opportunity to flip over to the long side.

I'll finish up this first look at September with another piece of bad news. The Amex Broker-Dealer Index (XBD) has given up all its paltry August gains and is grinding sideways at its 200-day moving average. Unfortunately, this churn might turn into a rollover pattern that eventually yields a retest of the summer lows.

This is an unwelcome development, because the broker-dealer group is a proxy for the trading environment three to six months into the future.

An index breakdown would tell us not to expect a year-end rally that saves the day. But let's stay optimistic for now and hope the index gathers the strength needed to rally over summer resistance at 221.

At the time of publication, Farley held none of the issues mentioned, although holdings can change at any time.

Alan Farley is a professional trader and author of

The Master Swing Trader

. Farley also runs a Web site called, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;

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