Extreme market pessimism has given way to hope as the market has picked itself up by the ‘ol bootstraps and staged a decent looking rally over the past several days.  Throw in a couple of accumulation days and you have the seeds of a major rally right?  Let’s not get too excited.. just yet.  While conditions have improved, tests of major resistance loom which aim to keep the current downtrend in place.  Until we can get a decisive surge above these levels, it’s best to err on the side of caution.

As we move into the latter stages of this bull market, the so called “goldilocks” scenario, where the economic numbers need to be good (but, not too good) continues to put a strain on the market.  This could be seen on Friday when a much better than expected jobs report failed to ignite another large move, most likely on concerns that it would lead to more aggressive rate hikes.  It makes gauging the effect of these numbers on the market difficult, at least initially.  Personally, I say to heck with all the numbers and let the charts do the talking.

Let’s take a look at the charts and what they have to say.

The Nasdaq remains the laggard of the major indices and currently sits a good distance away from the next major level of resistance around the convergence of the 50 and 200 day moving averages as well as psychological resistance at 2000.  This is a major hurdle for the Nasdaq and should be watched closely.  At this point, at looks like there is enough juice behind the latest move to at least test this level.

The S&P, while breaking out of that short term range around 1150, still has much work to do.  As you can see, the downward trend is still intact as long as it remains below that upward trend line off the August lows.  Currently, the S&P sits right at that point of resistance which is strengthened by resistance of the 50 day moving.  I can’t imagine that the S&P continues its V like move off the bottom and powers through this tough resistance area.  The damage done over the past month will need more time to repair itself.  Some sort of consolidation from here would be a more likely scenario.

The Dow also is also currently facing resistance at an area of previous support (which it broke through nearly one month ago).  Again, it appears more probable that that the Dow retreats from major resistance here before attempting another run at this resistance level.  How this retreat occurs will be very telling as to market health.  A quiet consolidation with light selling volume would be encouraging action and could set the market up for a big surge above these major resistance areas.

Sure didn’t take long for the market to brush aside the one day wonder move following Fed comments and wipe out major support levels.  The magnitude and decisiveness of the moves of the past couple of days will most certainly need some time to lose steam… and that means getting worse before it gets better.  The momentum is just simply too great.  Just how far this runaway train will run before coming to halt is anyone’s guess, but one thing is for sure.  Not a wise move to try and guess a bottom at this point.  The damage done is too fresh.  While we are approaching some minor support levels soon, stronger support doesn’t appear until the market has undergone a much larger drop.

For the Nasdaq, all eyes will be on the soon to be reached 1900 level, but taking a look at a longer term view of the chart reveals that a drop to 1750 is not out of the question at this point.

Looking at the Dow, you can see the kind of damage done last week as it plummeted below critical support around the convergence of the 200 day moving average and previous support around 10,365.  The next logical area of support would be around the "pyschological" support of 10,000, but I don’t think it can hold up there.  It would require the Dow to come to a screaching halt and reverse direction in a hurry.

It doesn’t look good for the S&P either, as it too broke through two key levels of support last week.  Like the Dow, there really aren’t any strong levels of support below – just a whole lot of resistance up above.  The major indices are really in no man’s land right now.  An area where it’s difficult to make money with consistency.  Now might be a great time to get away from the market for a week and spend some time reviewing past trades or picking up that trading book you haven’t had the time to read.