Stocks Bounce Back, But Is The Bottom In?

Was last week's high volume sell off a capitulation bottom?

Well, stocks bounced back in stunning fashion as investors shrugged off the events in Japan, and the unfolding crisis in the middle east.

The NASDAQ soared, rising nearly 3.8% for the week.

For the month of March, the S&P 500 is currently lower by about 1%, and the NASDAQ is down roughly 1.4%.

In the prior update, I stated that there was a decent probability that the markets had entered a corrective phase. I think that at this point, even after last week's bounce, this may still be the case. Until the markets confirm a new intermediate-term high, or we see a major follow through day, I think it would be wise to tread carefully. (Image: nickallen on Flickr)

Here are a few short-term support/resistance levels to watch based on last week's price action. First, the 1300 support area is undoubtedly a key level to watch. Also, keep an eye on Wednesday's low near 1285.

Friday's peak near 1320 may serve as a potential resistance level, and this area also corresponds to the apex of the triangle you can see on the following daily chart.

 

 

Last week, the S&P 500 reclaimed two key intermediate-term support levels, the 20 and 50 day moving average lines. While this is a positive first step for the bulls, it does not necessarily mean that we should run out and aggressively buy equities.

The benchmark S&P 500 index is once again sitting within a multi-month trading range (highlighted). Lets see if the bulls are strong enough to challenge the resistance level of this range before we dive head first into the market.

Generally, I would give the underlying intermediate-term uptrend the benefit of the doubt. But, the fact that we violently broke a number of key support levels last week has me concerned. Potentially, this weakness may foreshadow a much larger decline in the coming weeks/months.

While I am certainly open to the possibility that the bottom is in, the reward to risk ratio of chasing this market is less than ideal.

So, we will be patient here while the markets bounce around, and once the direction of the underlying trend is clear, we will allocate more capital.

 

 

As I said in the prior market digest, "this is a long-term update, and we focus on the big picture.

Is there any reason to think that this multi-year bull market is over? At this point, unlikely. Until we see the confirmation of a major intermediate-term lower low, or lower high, the long-term bull market remains in play.

What are some of the key support levels that we would need to see taken out here? Well on the NASDAQ, this means a clear break below 2500, and on the S&P 500, we would need to see 1230 taken out".

It still appears as though the NASDAQ may be setting up for a key retest of the 2007 bull market high. On October 31st, 2007, the benchmark index hit 2861, a level that would ultimately serve as the peak of a five year bull market. A clean breakout through this highlighted resistance level would be an important psychological milestone for this bull market.

Key intermediate-term levels to watch on the NASDAQ include resistance at the 2007 bull market high (2860), support near 2500, and the 10-week moving average line near 2725.

On the S&P 500, keep an eye on resistance near 1350, and the 10-week moving average support line near 1300.

 

 

Our Dow Theory outlook has been updated with new potential intermediate-term support levels. These areas have been circled in blue.

The Dow Jones Industrial Average and the Dow Transports simultaneously confirmed new bull market highs recently, and key intermediate-term support levels have been updated accordingly. There are no other changes to our Dow Theory outlook, and we remain on a long-term buy signal.

 

 

The Dollar Index added .65% last week, after a 1.4% decline two weeks ago.

The next major support area to watch has been highlighted.

At this point, the long-term trend is still bearish, as we remain on a 10/40 week MA sell signal.

 

 

Keep in sync with the market by following our updates. We offer a variety of methods to connect with Portfolio Tilt in real-time. You can click here to follow us on Twitter. We offer an RSS feed, and for you Facebook fans, we have a page as well. We also offer a morning e-mail update with all of our most recent content, click here to sign up.