Expect S&P to Stay Choppy for a While

We face weeks, even months of churn as we rebuild the wall of worry, so get used to it.
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This column was originally published on RealMoney on April 10 at 12 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Last Friday's depressing decline has a lot of folks talking about a failed rally. Although the major indices actually hit new multiyear highs last week, the pullback injected a lot of doubt into the market. After all, rates continue to climb after countless "second-to-last" rate hikes by the

Fed

.

But was last week's action really that bad? Perhaps the problem really lies with the expectations and desires of many of us who are simply tired of this choppy market. I know I'm tired of it. Heck, I wish we were all partying like we did in 1999. But you've got to get used to the anxiety and learn to handle it so you can recognize the opportunities at hand.

There are lots of reasons to believe that the major indices are in trouble right now. But then, there are always reasons to believe the major indices are in trouble. Think about it: If the major indices were all in a steep decline, what would most folks be saying? "Yippee, I've got a real buying opportunity here!"? Nobody says that. Sure, there are those who have the capital and coolheadedness to buy stocks on the cheap during steep declines. However, even those same folks probably are also managing their current portfolios of declining stocks. Declining markets worry all of us.

On the other hand, what if the major indices were screaming higher? All but the most naive market participants would be worried sick that the market was in blowoff mode, that a buying crescendo was about to end badly. Many would be reluctant bulls.

As paradoxical as it sounds, most folks would be uneasy about making so much money so quickly and easily. Of course, there would also be a small contingent of folks who truly believed that they had finally cracked the code to Wall Street. But the more savvy crowd would be concerned and would be protecting profits accordingly.

A choppy, sideways market would also be a source of concern. After all, when the trend isn't your friend, you tend to be much more acutely aware of everything that could possibly take the market down. That's just human nature.

So irrespective of the current character of the market, the wall of worry will always be there. You might as well get used to it, because you've got to climb over it if you want to get paid.

Let's look at a chart of the

S&P 500's

ETF to see how bad things really are, as well as a few other charts.

This daily chart of the

Spyders

(SPY) - Get Report

shows how often we see breakouts fail. In mid-December, the S&P and its tracking ETF briefly broke above the November high. A couple of days later, the breakout failed, and the bulls wept. We even saw a little downside breakout near the end of December.

But early January brought another breakout. This one pushed higher for a while, but it ultimately fell back to the $125 level in early February. We see a similar pattern again in February and March. The February high coincided with the January high, a "double top" in the making. But the mid-March breakout trumped the bears.

So where are we now? Once again, flirting with a new trading range. However, the first thrust above the March high has failed to hold, just like the predecessors of the last two breakouts. We could see a few more weeks or even months of chop before the S&P hits a new high. But the monthly chart that I featured

last Monday should make it easy to understand that pullbacks are still buying opportunities for those with longer time horizons.

This daily chart of

F5 Networks

(FFIV) - Get Report

shows a broken trading channel. The relative strength index also has broken down beneath the midline, reflecting the weakness of the stock. The next level of support is likely to be down at $60, the February low. But before you give up on F5, let's look at the weekly chart.

Last week's decline in F5 was on very heavy volume. This high-volume selloff doesn't often occur. The high-volume decline of last July was followed by additional selling. But notice that the high-volume decline in early January was simply a washout that cleared the way for additional advances. So what's next? I'd respect the uptrend, but I'd also focus on the price action this week. If the stock firms up today and Tuesday, then last week's decline was probably the result of profit-taking after the stock ran up into quarter-end. But if we instead see lower lows from here, I'd shy away from F5.

Boeing

(BA) - Get Report

has been in consolidation for the past few weeks. But we saw a breakout last Thursday. While Friday's close was weaker, the breakout level still held up, and Boeing lost very little ground despite the broader market's pronounced weakness. That's a positive sign, and it would make me want to be a buyer now, with a stop just beneath $77.50.

A reader asked me where I saw the next resistance level on

Charles Schwab

(SCHW) - Get Report

, which I featured

in January. Frankly, I don't see any significant resistance on Schwab other than the periodic profit-taking potential that's present on all uptrending stocks. Schwab is at the highest level it's been since 2001. I discount resistance that's more than several years old. I just can't believe that more than three or four shareholders would have held the stock through the entire decline and rebound. And I doubt that those persistent folks would be inclined to sell now. Therefore, I'd pick $20 as a logical resistance level, and then mainly because even numbers tend to attract limit-sell orders.

The

Biotech HOLDRS Index

looks close to completing a top formation. This weekly chart of the IBH shows a February high that was much lower than the November high. That's a problem when you also consider that the October low is close to being violated. A bounce from these levels is almost predictable, but I wouldn't be comfortable owning much biotech until the IBH was back above last week's high. And even then, I'd really need to see an advance above $200 before I'd be confident that I'd bought a dip rather than a top.

Be careful out there.

Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. At the time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;

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