It’s on.. Let the bull and bear tug ‘o war begin! After the bears had the run of the place over the past couple weeks the bulls have begun to step up and defend their ground a bit, but today they looked tired and counting the days to the 3 day weekend.  It seemed nearly everyone expected this morning’s bounce to be the beginning of a little buying spree from bargain hunters and short covers, but that will have to wait.  While the bleeding has stopped, it’s clear sellers still have the upper hand for now.

Today I take a close look at the S&P, starting with a long term weekly chart and ending with a one month daily chart to get an idea of what kind of shape we’re in.  In the 2 year weekly  chart you can see the long term trend line and what I would call the last line of defense for sustaining the bull market.  This support area appears to be in the 1235 – 1240 range.

On the 1 year daily chart of the S&P you can see that the area between about 1240 and 1255 is a major area of support convergence with the 200 day moving average (~1258), channel support (~1250) and the long term trend line (discussed above ~1240) all coming to a head.  I’d like to see some sort of massive capitulation (high volume selloff in the morning followed by massive volume to close out the day) with the lows at some point in this range.  That kind of action usually signals a bottom.

The one month chart provides a nice close up look of recent action.  You see the high volume distribution days and the bouncing around at support of the 200 day moving average.  On the 18th of May, the instensity of the selling subsided with a lower volume decline.  Following that, was a nice higher volume reversal day off support which can indicate that the bulk of the selling is done (much of that move was probably short covering though).  You can see there are some positive signs but we’re not out of the woods, especially considering todays big reversal off the highs to finish at the low of the day.  There is work left to do and I wouldn’t not be an aggressive buyer here (nor would I be aggressively pursuing shorts at this level).  I personally have begun nibbling on some liquid, larger caps names such as Google and Apple, but that’s about it.  I’ve been sitting on mostly cash for some time and will remain there at least through next week.

Here’s a longer term weekly chart of the Nasdaq which allows you to better see volume levels over a longer time horizon.  Notice the violation of the one year trend line.  Next stop: the "not quite" 2 year trend line around 2140.

Last but not least, the daily chart of the Dow.  Notice the violation of the trend line off the October 2005 lows which sets up the probability of a move to test the next level of support: Dow 11,000 in the coming days.