The Nasdaq led the way today as potential resistance around 2200 (see yesterday’s post) proved to be no match.  Volume edged higher across all indices and closed near the highs of the day.  The action doesn’t get any more bullish than that.  While today’s action was significant and yet another indicator of great market strength, I think more important will be the follow through action over the next week or so.  Will the Nasdaq hold and create a new support level at these four and a half year highs?  Let’s see if the Dow can break out of its trading range between 10,600 and 10,700 and make a move on Dow 11,000.  Now, that might even get old uncle Larry off his easy chair and into the market again, fueling a wild rally to Dow 12,000 by the end of the year.  OK, I’m getting ahead of myself.  I’ll stop now.  Actually, I wouldn’t mind seeing a 2 – 3% pull back and consolidation throughout the month of August, creating entry points in stocks that have gotten ahead of themselves, then a big end of year rally.  Maybe then, just maybe people will begin to start talking about stocks again at cocktail parties, instead of real estate!

It’s been quite a ride for the market over the last couple of months and there really isn’t any reason to think it can’t continue.. which is what has me a bit on the cautious side.  While the market looks very healthy here, there is a bit too much optimism out there.  Not to mention the Nasdaq will face some pretty stiff resistance around the 2200 mark.  I think this level is every bit as important, if not more so than the resistance at 2100 it cleared on July 8th.  Its a level at which the Nasdaq has been unable to clear at the beginning of ’04 and at the beginning of ’05.  Whether the 3rd time is a charm is anyone’s guess at this point, but history should make you swing just a wee bit to the side of caution.  I’ve certainly begun to move off margin and will be vigilant about locking in profits should the situation arise.  At any rate, should be another interesting week.. never a dull moment in this business!

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?

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.

The Fed threw the market a life preserver today.  Comments alleviating concerns of a more aggressive policy whipsawed the market in the opposite direction, saving the market from drowning and undoubtedly inducing some short covering along the way.  While big reversals like this often mark the bottom of a correction, I see this as more of a knee jerk, relief rally.  It was nice to see the market looking for an excuse to rally, but It will take a couple more days to get a firm sense of the impact of today’s action.  Another day of heavy accumulation would provide the signal to pursue long opportunities with a bit more aggression.

The Nasdaq, once again dangerously close to plummeting below its last line of support, was able to claw its way back above this key level to remain "in the doghouse" that it’s been in for the last couple of weeks.  Should today’s action propel the Nasdaq higher in the coming days (and there’s a good chance it will), it still faces major resistance around the convergence of the downward trend line and the 50 day moving average.  There is much work to be done!

The thing that stands out in the chart of the Dow today is the bounce off that key support level around 10365 or so.  It could be enough to propel the Dow a few hundred points into resistance.  This area around 10365 is so crucial in my opinion.. If we drop below that level, here comes 10,000 and possibly much lower.  The the other important thing to note is the topping formation that both the Dow and S&P may complete in the next few months.  It’s probably more head and shoulders than triple top, but either way you look at it, it’s cause for concern and something to keep an eye on over the next several weeks.  The area around Dow 11,000 will be a major source of resistance should it get that far.

Here’s the longer term view of the Dow which shows the importance of holding at current levels.  The longer term, bull market uptrend is in danger.

Just short lived short covering or something more?  That’s the question after today’s big move up from oversold conditions.  You’d think with the broad based rally throughout the day,  that volume would have swelled.  Not the case.  Volume levels were disappointing, indicating institutions continue to be less than enthusiastic about putting cash to work.  Today’s move was a move in the right direction, but until we see some heavy volume up days, nothing has changed.  A cautious approach remains the best strategy.

The Nasdaq managed to reclaim critical support around 2000, but as you can see, volume was below average.  Suprising, considering the magnitude of the gains.

The Dow continues to hold above support around previous consolidation and the 200 day moving average at around 10,375.  This is a very important area of support for the Dow and will be watched closely.  If it can’t hold there, a drop to 10,000 becomes highly likely.

The S&P also remains above key support of previous consolidation (around 1160 – 1165) and the 200 day moving average at 1150.  Should today’s bounce continue for a few days, it may hit resistance of the 50 day moving average at 1195.  I would expect both the Dow and S&P to yo yo between their respective support and resistance levels for a couple weeks before the next big move in either direction.  One thing is clear though.. the technical action indicates an ornery market and that doesn’t look to change for some time.