On a day like today it’s very easy to see all that green and want to jump in with both feet and forget about where we are coming from.  Granted, if you’re swing or day trading today’s move created opportunity.  But for those not interested in the short term thrills this market has been offering recently, it’s important to keep the bigger picture in mind.  Despite today’s thrilling move to the upside (or so it seemed thrilling to CNBC), the market is still seeking a bottom and today’s move only gets us to first levles of resistance.  Nothing more than that for now.  Let’s not get too excited yet longs.. there is much work to do.

There is room to run yet before that resistance level is met, so we’ll probably get some more green tomorrow at the open.  With options expiration it should be an interesting day.  That was a big time move today, but where is the volume to accompany it?  Sure it was higher than yesterday, but not well above average.  Institutions aren’t yet putting money to work but the picture for longs is continuing to improve. 

Same story with the S&P.  Some room to run before resistance comes into play.  There is probably enough momentum from oversold conditions to clear that first level of resistance at the 200 day moving average around 1260 and touch the downward trend line at 1270.  I’ll be looking for a couple short term short plays there should it happen. 

On a day like today it’s very easy to see all that green and want to jump in with both feet and forget about where we are coming from.  Granted, if you’re swing or day trading today’s move created opportunity.  But for those not interested in the short term thrills this market has been offering recently, it’s important to keep the bigger picture in mind.  Despite today’s thrilling move to the upside (or so it seemed thrilling to CNBC), the market is still seeking a bottom and today’s move only gets us to first levles of resistance.  Nothing more than that for now.  Let’s not get too excited yet longs.. there is much work to do.

There is room to run yet before that resistance level is met, so we’ll probably get some more green tomorrow at the open.  With options expiration it should be an interesting day.  That was a big time move today, but where is the volume to accompany it?  Sure it was higher than yesterday, but not well above average.  Institutions aren’t yet putting money to work but the picture for longs is continuing to improve. 

Same story with the S&P.  Some room to run before resistance comes into play.  There is probably enough momentum from oversold conditions to clear that first level of resistance at the 200 day moving average around 1260 and touch the downward trend line at 1270.  I’ll be looking for a couple short term short plays there should it happen. 

When the market is searching for a bottom and you see it drop like a stone with heavy volume, you have to be on the lookout for that dramatic reversal that signals a bottom.  We got it today.  In a report a couple days ago I mentioned that the reversal had me unconvinced because it was lacking volume.  That was certainly not the case today.  In fact today marked the 4th highest trading volume day in its history (the biggest volume day was on April 18th 2001 when the Nasdaq traded 3.08 billion shares – surprisingly the only time it has traded more than 3 billion shares).  While the Nasdaq didn’t close in the positive (the only negative of today’s action), it did reclaim a very important support level at its trend line off of the October 2005 lows.  Have a look.

While the S&P finally broke down below the 200 DMA, it still had support of its trend line which it bounced off of in convincing fashion today.  I didn’t go back and research volume levels for the S&P tonight, but no question it was up near a record as well.  One negative is the fact that it did not reclaim support of the 200 day moving average.  It would not at all surpise me to see the S&P retest that trend line at some point in the coming weeks.  You’d like to see that happen with declining sell volume.

The Dow broke through its 200 day moving average today too, but it was able to reclaim that support level.  Volume wasn’t quite as good in the Dow, but impressive action nonetheless.  It still has support of its trend line off the October ’05 lows around 10,500.  There certainly is a good possibility of testing that level before the summer is over.

So where to go from here?  I personally took profits in short positions today and dabbled in a couple long plays in my personal accounts when it was clear the reversal was taking shape.  This volatility has certainly created many opportunities for those getting in and out in a few days time, but those kinds of opportunities are better geared towards the trader who’s able to track the markets all day.  For most investors (who aren’t able to keep close tabs on the market during the day), the best option is to remain largely in cash while the market gyrates back and forth finding a bottom.  You’ll save yourself the stress and probably quite a bit of money by continuing to be patient.  From here, we most likely see a continuation of the springboard action we saw today for a day or two, but it should come back and possibly retest the lows.  At this point, a big long signal would occur on some kind of confirmation day (a 2% move up with heavy volume).

The good news – the market avoided collapse on heavy volume.  The bad news – the reversal didn’t occur in very convincing fashion.  At this point, it’s very difficult to play the market either way.  A bit late and/or too early for aggressive shorting and muuuuch too early for aggressive buying.  Best to remain largely in cash right now with a bias to the short side. 

A look at the Nasdaq below highlights the breakdown, followed by the bounce, then the resistance.. and now the retest of support and possibly previous lows.  I’m too lazy tonight to include a long term chart as well, but I’ve included where the long term trend runs through (which the Nasdaq has been testing).  This is an absolutely critical level of support for longs.  If the market can’t hold here, we’re most likely headed for "bear market" terrority.  There really isn’t much room to run from here .. The bounce off support today was important, but the lack of conviction behind the move is a concern.  It didn’t have the same oomph (hope I spelled that right) behind it, that the reversal on the 24th had.  For one, the volume was above average (barely) and higher than the day before, but you want to see that volume way above average on reversal moves.  Additionally, we didn’t get a close at the highs of the day (it didn’t even clear the opening price).  At this point we need more clues as to direction.  Some kind of confirmation move (meaning a 2% gain with very heavy volume) in the next week or so would be the signal for bulls to begin putting money to work on the long side.  Of course, a high volume move below key support levels (where we’re at or close to now) would give bears the signal to go ahead and pursue more short positions.  I’m currently dabbling on both sides just a bit, but with a bearish bias.  It will be interesting to see if the market can follow through on today’s reversal and hold the gains for the day.  It will provide another clue to just where in the heck this market will be in the next couple months.  Stay tuned!

I’m throwing in a chart of the Dow to give a look at the longer term picture.  You see the violation of the trend line off the October lows, followed by a fairly weak bounce to resistance and a retest of support.  There me be some psychological support around Dow 11,000, but more important will be that 200 day moving average around 10875.  In all likelihood it will test that support line in the coming days.

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.