SHORT-TERM BOUNCE CONTINUES AS MARKET INDEXES BOUNCES OFF 200-DAY AVERAGES AGAIN -- MONTHLY AND WEEKLY CHARTS, HOWEVER, STILL LOOK TOPPY

THE DOW IS BACKING OFF FROM 2000 PEAK ... Whenever the market is at an important inflection point, it's usually a good idea to take another look at long-term charts. Not that short-term trends aren't important. But longer-term trends are more important. That's why I thought this would be a good time to consult the monthly charts for two of the major stock indexes. Chart 1 shows the Dow Industrials right up against their all-time high reached at the start of 2000. The major trend is still up. In chart work, however, a test of a major previous peak is a caution sign. That's because previous peaks are major resistance barriers. To make matters worse, the monthly stochastic lines are starting to weaken from overbought territory over 80 (red circle). And May's price downturn was accompanied by heavy trading volume. I've heard market analysts say that the recent pullback isn't any different from previous ones over the last two years. Those previous pullbacks didn't start from a major resistance barrier.

Chart 1

NASDAQ MONTHLY MACD AT CRUCIAL POINT... While the Dow Industrials held up better than the rest of the market during May (which I view as a defensive sign), the Nasdaq was the biggest loser. That it itself is a caution sign for the market. The monthly candlesticks for the Nasdaq Composite Index also show a potentially dangerous situation. The monthly stochastic bars (on top of chart) have turned negative from overbought territory. And May's downside volume was heavy. Those are both caution signs. In my view, the most important indicator is the monthly MACD indicator. The blue bars show the MACD histogram (which plots the difference between the two MACD lines). Major signals are given when the bars cross zero. The last major sell signal was given in 2000 (red arrow). The last major buy was given at the start of 2003 (green arrow). The histogram is sitting right on the zero line. It bounced off the zero line in the spring of 2005 (blue arrow) which extended the life of the bull market. It's threatening the zero line again. That puts the Nasdaq at a crucial juncture. [To date, none of the monthly charts have given a major MACD sell signal. But they're getting dangerously close].

Chart 2

WEEKLY S&P INDICATORS STILL NEGATIVE ... I'm going to switch over to a weekly chart of the S&P 500 to put its May downturn into some perspective. Chart 3 shows that the weekly stochastic lines (on top of chart) and the weekly MACD lines (below the chart) are still negative. Until they turn positive, the recent rebound in the market has to be viewed with some skepticism. The two moving average lines are the 20-week (blue line) and the 80-week (red line). [I got the red line by transposing the 20-month line to a weekly version]. The blue line has been useful in spotting short to intermediate-term downturns like the one we're in now. The S&P would have to close back above that line (currently at 1288) to signal that it's out of danger. The red line has contained the last two downside corrections in 2005. That makes it a dependable support line. So far, it hasn't been broken.

Chart 3

SHORT-TERM TREND STRENGTHENS ... Last week, virtually all market indexes (with the exception of the Nasdaq) bounced off their 200-day moving averages. Tuesday's heavy selling resulted in another test of that long-term support line and it held again. Two successful tests of the 200-day line have strengthened the short-term market trend. Daily stochastic lines are positive and daily MACD line are close to turning up as well. I suggested last week that a close over 1280 by the SPX could result in a further recovery to its 50-day average (currently at 1296). Today's move above the 1280 level increases the odds of that happening (although it came on lighter volume). The bigger question is what happens after that. The ability of market indexes to hold their 200-day averages is encouraging. That has kept the major trend from rolling over. My main concern, however, is with weekly and monthly charts which continue to look toppy. Although no "major" sell signals have been given yet, they're keeping me very cautious on the market between now and the autumn.

Chart 4