Stocks suffered a case of euphoria interruptus Monday, as a seemingly unstoppable climb abruptly reversed in the final 90 minutes of the trading day. After trading as high as 9003.27, its first trade above 9000 since Aug. 27, 2002, the Dow Jones Industrial Average closed up a relatively paltry 0.5% to 8897.91. The S&P 500 gained 0.4% to 967 vs. its intraday peak of 979.11. Bucking its recent trend of relative strength, the Nasdaq Composite shed 0.3% to 1590.75 vs. its apex of 1620.80. Although much of the media's attention was dedicated to Dow 9000 and Nasdaq 1600, the S&P's attempt to eclipse 965 was far more important from a technical point of view. In addition to representing the S&P's highs last August, 965 represents the "neckline" of a so-called head-and-shoulders pattern in the index going back to its lows in the fall of 1998. By closing above this neckline, the S&P invalidated the head-and-shoulders pattern, a bearish chart formation characterized by two outside peaks (the 1998 summer highs and August 2002 highs) and one higher peak (the 2000 highs) in the middle. Some technicians had suggested the rally since mid-March was merely another bear market interlude unless the S&P surpassed 965. Among them was Phil Erlanger of Erlanger's Squeeze Play, who dubbed such an accomplishment "the first step in turning around the long- and mega-term status of the market," i.e., ending the market's long-term bearish pattern. However, the S&P's failure to sustain its intraday momentum could signal a false or "marginal breakout" of that key resistance point. In other words, the S&P's close above 965 is mitigated by Monday's internal dynamics. "The key will be how the market handles the next cycle of fear ... whether it be a fear of heights, a fear of economic ails or a fear of geopolitical events," Erlanger wrote. "We continue to favor a hedged position until the market can test 965 as support," which the index nearly did Monday.
It's All Good ... Until It's Not
Early on, there wasn't much fear of anything, except maybe missing the rally. The bullish crowd was ebullient, thanks to a better-than-expected report from the Institute for Supply Management; bullish developments from biotech favorites Genentech ( DNA) and ImClone ( IMCLE), which closed off session highs but still up 6.6% and 19.6%, respectively; a merger between software makers PeopleSoft ( PSFT) and J.D. Edwards ( JDEC); plus supportive comments about the dollar by President Bush, which pushed the euro to $1.1749 from $1.1770 late Friday, although up from its intraday low around $1.1720.