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.