Sometimes it’s easy to lose site of the big picture when the market’s consistently rising and get caught in the trap of “the market will continue to rise”.  In fact, writing these reports every so often helps to keep me in focus and listen to what the market is telling me rather than following the emotions of the masses and “hoping” that the market will move in the direction that I desire.  With any sustained decline or advance, it’s important to look at it not as an isolated move, but a small move in a much larger trend. 

So, what is currently the prevailing trend?  At this point it’s important to remember that this bull market is nearly 3 years old if using the absolute bottom in October 2002 (however, a new bull market was not confirmed until March of the following year).  After a big move in ’03, the market has been trading in a channel for the past 18 months never meeting the bear market definition of a 20% decline.  Is this just a long consolidation before another big bull run or a prelude to steep declines characteristic of a bear market?

At this point, it’s difficult to say.  However, looking at the technicals of the major indices, it’s clear that there are major hurdles to clear and that there is indication that a big, bad bear stands in the way of the bull.  These signs show up in the crossing over of the 200 day moving average by the 50 day moving average in the Nasdaq and Dow as well as the potential for a bearish head and shoulders formation in the S&P and Dow (see charts below for more detail).  Combined with the lack of buy volume and it’s clearly best to remain on the cautious side. Let’s take a look at the charts (note: these were drawn yesterday)

Below is a chart of the Nasdaq and important points are resistance at 2150, the bearish crossover and the lack of buy volume.  Look for support at around 2000 should we get a healthy consolidation from here.

Looking at the chart of the Dow, you can see where the potential for a bearish head and shoulders could come into play.  Again, notice the bearish crossover of the 50 day moving average as well as the lack of buy volume during this latest advance.  Key support for the Dow remains in the 10,400 area.

The S&P looks similar to the Dow with the potential for a head and shoulders pattern.  Look for 1200 to be a possible resistance point and the top of a right shoulder for index.  Key support remains in the 1175 area.