Technical Analysis: A Nice Reversal

A nice reversal today, but it came on lower volume than yesterday, and the failure of either exchange to register 80% upside volume is a negative. That said, for now price may be pointed higher, and with all the puts out there, that’s not too surprising. The short sellers are the one thing propping up the market here. Still, there are a number of critical tests just ahead if the market hopes to rise substantially from here. The Dow (first chart below) broke back above the important 8522-8530 level, which is now once again support. Resistance is the index’s upper channel line at 8660. The S&P (second chart) has tough resistance at 940-945, and support is 923, 920 and 915. The Nasdaq (third chart) is back at the critical 1521-1530 resistance level; above that, the techs have room to run. However, the Nasdaq 100 (fourth chart) continues to lag and is some distance from 1155-1161 resistance. When the big techs lag, that’s a negative divergence. Another laggard here that should worry bulls is the bank stocks (fifth chart). This rally will need stronger participation from the financials if it is to succeed. All the indexes have dojis on their weekly charts (not pictured); a down week next week could form a significant reversal. Finally, the VIX (sixth chart), the options volatility index, has run along its lower weekly Bollinger Band for four straight weeks for only the fourth time in 9 years. Two of those previous times (July 1998 and March 2002) occurred at major tops. The market fared better in mid-1999, but still had a sharp three week correction before recovering.

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