NASDAQ Commentary

The NASDAQ Composite rallied by a robust 2.11% on Wednesday, gaining 47.30 points to end the session at 2290.95. It was the biggest one-day gain since June 28th, which is not necessarily bullish at all - more on that below. For the week, the composite is up 32.52 points, or 1.44%. While the bulls are grateful for yesterday, we still see a chink in their armor.

How did a week that started out on the bearish side of things turn so quickly to the upside? The answer is, the same support line we plotted in the Weekly Market Outlook. On our chart, it's the broad green line that tagged Tuesday's low of 2224.21, and then pushed the index back up to 2243.65. Like we said then - and as we'll repeat now - until that support line is breached, we have to assume more bullishness is in store. Sure enough, we saw it materialize yesterday. Now that same support line is at 2234, and rising.

Are we surprised that the support held? A little. Complacency is high, with the VXN still at very low levels. And, the NASDAQ is well into an 'overbought' state...not to mention that profit-taking looks a little more prudent now, in the wake of a very nice three-month rally. Yes, the composite is vulnerable here.

However, being vulnerable isn't enough. The support line prodded another rally, the third one since August.

On the other hand, yesterday's heroics also leaves the NASDAQ doing battle with another key line...a resistance line (red). It's only come into view within the last couple of weeks. Currently at 2300, it's just a hair above the NASDAQ's close, and if history holds true, this is about the time when the index starts to roll over and head back to the lower edge of its range. We have no reason to think this time will be any different.

So then, the generally bullish range, framed between the red and green lines, is the only story for now. Assume it will hold this general uptrend in place until one side or the other breaks. Note, however, that once the support side (green) of the range breaks, it could jump-start a pretty good-sized pullback, as vulnerable as the market is right now.  

NASDAQ Chart

S&P 500 Commentary

Yesterday's 16.10 point push (+1.21%) put the S&P 500 further into new highs for the year, with a move that could be considered unusually bullish...and maybe even a little suspicious. The close at 1350.20 is 14.35 points above Friday's close, making yesterday's rally the only reason the large-cap index is back in the black. For the week, the SPX is up 1.07%.

As with the NASDAQ, the key thing to note on the S&P 500's chart is the generally bullish channel, also plotted below with a green support line, and a red resistance line. The key difference here is that the SPX actually closed slightly above its resistance level yesterday. In some regards it constitutes a bullish breakout move, but that market hasn't been all that willing to follow-through on major upside breaks...for about the last year. So, we're not jumping into bullish trades based on yesterday.

If anything, we're concerned that Wednesday's move could be a repeat of the one we saw on August 4th. The SPX traded above the upper resistance line briefly that day, only to end up pulling all the way back to the lower side of the range. In fact, it was around this time that the first set of nodes was placed for the bullish channel we see now. Add in the fact that we're stochastically overbought (again), and you just have a lot of things working against stocks, at least in the short-term.

But, until the bullish channel starts to break up, the best bet may be to play the range, while keeping in mind that strong bottoms usually occur at some point in October.

In the meantime, we have to wonder if yesterday was a blowoff top, the final hurrah in a bullish trend. We saw a move of the same size in June, but the composite ended up sinking - in a big way - just a few days later. The scenario now is a little different, but not necessarily better. If that support line is going to break, yesterday's sharp rally is far more likely to set up the plunge that could do it. Watch closely over the next few days.

S&P 500 Chart

Nothing really new to add here. The Dow has the same support line as the SPX and the NASDAQ. If it's not that support line (green) pushing the index upward on each pullback, then it's either the 10 or 20 day moving average lines doing the job. Eventually all three of them will break, and we'll finally get the pullback we're due for. But for now, the trend is onward and upward. However, don't forget to play defense. When things look too good to be true, they usually aren't.

Dow Jones Industrial Average Chart

Price Headley is the founder and chief analyst of BigTrends.com.