After briefly breaking out of a fairly tight trading range towards the end of the last week, the market reversed course in a big way on Thursday and Friday.  Conditions were certainly ripe for some profit taking, especially with strong resistance remaining in the Nasdaq, but the magnitude of the decline raises a red flag.  The Dow looks awful at this point, plummeting below all major resistance levels in just 2 days.  The S&P and Nasdaq are fairing much better, with each above major support levels of the 50 and 200 day moving averages.  The action indicates that we’ll probably remained mired in a choppy trading range for at least a few more months.  It just seems highly unlikely that the market can muster enough strength to break out any time soon.

It should be a very interesting week ahead of the holiday weekend with the FOMC meeting on Thursday coinciding with end of quarter reshuffling.  After locking in profits and/or limiting losses on nearly half of my positions over the past couple days, I for one won’t be doing any more major buy and selling until the end of the quarter flurry is firmly framed in the rearview mirror.  We’ll have a much better idea of the health of the market several days after the 4th of July.

In the chart below, you see that the Dow has broken through major support of the 50 and 200 day moving averages with heavy volume.  The next logical support for the Dow would in the area of the Dow 10,000, where it found support in the last leg down.  It’s going to be very difficult for the Dow to put the brakes on the downward momentum and push back up through those major resistance levels.  Doing so quickly would be a major positive for the market, but I just don’t see that happening.

You see the Nasdaq hitting resistance at 2100 once again.  I wouldn’t be placing large bets on much of anything until the Nasdaq can clear that resistance area with good volume.  Next logical area of support around 2000.

The S&P remains in much better shape than the Dow, but it’s difficult to ignore that head and shoulders (although not very symmetrical) topping action.  Look for firt support around 1175.

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.

Just when it appeared the market was going to run into resistance and fall flat on its face once again, a bullish inflation number sparked the market to a big rally above resistance, possibly setting the stage for a summer rally.  Lets see how new found support holds up in the coming days, which would provide confirmation that the rally is real and not just a head fake.  The impressive thing about today’s move was the gap up, the breadth and the close near session highs with volume.  The bull may be ready to run.

It wasn’t long ago that the Nasdaq looked dead in the water.  Recently, with the help of a surge in semis, the Nasdaq looks strong and ready for a larger move up.  Surging above 3 major resistance levels with ease (50 DMA, 200DMA & downward trend line) in the last week is mighty impressive.  How it consolidates these gains will be just as important as the gain itself.  Does it pull back quietly and retest new found support around the downward trend line?