On Tuesday, the market appeared to be setting up for a tradeable rally off support levels by reversing sharply off the lows in higher volume.  It didn’t take long for the bears to rush in and spoil the optimism, taking out key support levels in the process.

With geopolitical concerns comes rising oil prices, comes curbing inflation worries, comes slowing economy..  sure, that’s a wall of worry for the market to climb, but the wall may be too big.  Here’s a look at the chart of crude.  I’m still not completely convinced that crude is going to break out of this base successfully and soar to $100/barrel, but anything is possible.  I’d want to see one more big move above $76/barrel and close there to be convinced that out of control crude prices were on the horizon.

It’s easy to fall into the trap of trying to anticipate moves off the bottom, instead of being patient and waiting for the sure thing.  I was guilty of this and put on an additional long trade on Wednesday, in anticipation that the market would follow through higher for at least a couple days.  Hopes for a quick gain quickly turned into cutting and running with a small loss. 

With the rally attempt failed, we now turn our attention to bottom seeking mode and how much room to the downside could be expected.  The bad news is that the Nasdaq is now firmly entrenched below support of its 2 year trend line and will need a 100 point rise just to get back to that resistance level.  If it weren’t for the S&P and Russell 2000 Growth Indexes holding support above their 2 year trend lines, I’d say we’re in for a lengthy bear market.  It’s the last glimmer of hope for the bulls at this point.  Let’s have a look.

Looking at the 2 year trend on the weekly chart, you see the Naz flirting with that support level over the past month or so, but ultimately holding above.. that is until this week.  Will it reverse sharply and hold that line of support again by Friday of this week?  No, the Nasdaq won’t be rising 100 points tomorrow, so the Nasdaq will close significantly below this key support level.

With the Nasdaq taking out the June lows today, look for a retest of the October lows in the next several days at around the 2025 level.

The glimmers of hope shown below.  Both the S&P500 and the Russell 2000 Growth index [represented here by the Ishares ETF (IWO)], continue to hold above their 2 year trend lines.  If I were a betting man I’d say these support levels would be violated in the next couple of days.  It’s important to see how they recover though.  Perhaps, some sort of capitulation move is in order where these support levels are violated with panic selling, only to give way to a massive reversal.  After selling a few small, long positions today, I’ll be watching this unfold from the sidelines.