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Dow, S&P Hold Main Bull Market Support

Yesterday's lows on the Dow and S&P 500 tested and held the indexes' main bull market trendlines from August 1982.

That makes 8480 on the Dow and 984 on the S&P 500 critical support levels here. With the S&P futures down about 20 points this morning, those levels could potentially be retested today.

Those lines (see charts below) could potentially be the start of a rally, as we mentioned yesterday. But longer term, another leg down, perhaps to the 1998 lows of 920 on the S&P and 7500-7800 on the Dow, is still likely. Bear markets don't respect support, and every other trendline from the long bull market has been broken.

According to Elliott Wave technicians, a move below about 1485 on the Nasdaq, 998 on the S&P, or 8590 on the Dow could lead to a retest of the lows.

Many technical and sentiment indicators have improved in recent days and are more supportive of a near-term bottom. One glaring one that is missing, however, is a high TRIN reading; a daily close above 3 or 4 on that index would show very high selling pressure similar to the April bottom. The Fed intervention in the market is likely preventing that from occurring, a peril of markets that are not allowed to trade freely.

One sign of weakness yesterday was that the Philadelphia Semiconductor Index was down 3.8%, much worse than the Nasdaq; the semis tend to lead tech stocks. Buying is likely to appear first in the Cyclical Index (CYC); that hasn't occurred yet. And the Banking Index (BKX) is sitting on a major support at 750; a close below that level would be negative.

There are a number of reasons that pressure remains on this market. Losses in the futures and derivatives markets have been huge; many firms must now sell to cover those losses. Japanese banks face a couple of big deadlines at the end of the month - mark-to-market and an IMF audit - and are likely selling stock to meet capital adequacy requirements.

But certainly we are much close to a bottom than we were when the Dow began its free fall from 10,000, and for traders who were wise enough to raise cash when the market was much higher, a good buying opportunity will eventually materialize.