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Technical Analysis: The Nasdaq Breaks Out

The Nasdaq (first chart below) is trying to break a 10-year downtrend here — no small feat for the stock market if tech stocks can continue to push ahead here, as the market continues its recovery from the worst bear market since the Great Depression, and by some measures the worst decade on record.

The next major resistance level for the Nasdaq is 2551, the May 2008 top. Support levels are 2346-2358 and 2300-2326.

The Dow (second chart) has made a new recovery high, along with the Transports (not pictured), which means the stock market won't be giving a Dow Theory sell signal anytime soon. Dow Theory remains on a buy signal from last July.

The Dow is also above the critical level of 10,683. 10,730 is first support, and 10,350-10,400 is a major uptrend line if the index corrects back that far. 11,000 and 11,400 are the next big hurdles for the bulls.

The S&P 500 (third chart) is coming up on the tough resistance level of 1200 here. Between the Dow and S&P, the market has been wrestling with some very important levels — the point where the bankruptcies of Lehman and AIG turned the bear market into a systemic crisis. These levels could be important trading fulcrums — and economic indicators — for some time to come.

The S&P has support at 1150, 1140, 1130 and 1120, while an uptrend line at 1100 is critical.

Bullish sentiment is once again getting a little extreme, a cautionary sign, with Investors Intelligence Bulls-Bears at 49-20.5. The peak reading back in January was about 53-16.

We're in what has historically been the weakest year of the four-year presidential cycle, the mid-term election year, but it is also the year that has produced the highest number of major market bottoms. A scary sell-off at some point in the next six to seven months that produces an enduring low would fit the historical pattern.

Paul Shread is a Chartered Market Technician (CMT) and member of the Market Technicians Association. He is a co-author of the book "Dow Theory Unplugged" from W&A Publishing.