DOW BOUNCES OFF MAY LOW WHILE NASDAQ HOLDS MAY HIGH -- STOCK INDEXES, HOWEVER, ARE STILL TRADING BELOW LAST WEEK'S HIGH -- MOVING AVERAGE LINES HAVE PROVIDED SUPPORT DURING RECENT PULLBACK

DOW AND S&P BOUNCE OFF MAY LOWS... During any market pullback, the first layer of support is usually a previous reaction low. That's why we chose the May low as our initial downside target for the Dow and S&P 500 indexes. Arthur Hill showed the Dow bouncing off that support level on Thursday. The hourly bars in Charts 1 and 2 show the action since the start of May in closer detail. Chart 1 shows the Dow bouncing off its May low near 8220. That raises two possibilities. The first is that the pullback is over and the uptrend is ready to resume (or move sideways for awhile). The second possibility is that we've just completed the first downleg in a bigger correction. In other words, the current bounce could be a "right shoulder" in a short-term "head and shoulders" top. For that more negative possibility to be ruled out, the Dow needs to clear initial overhead resistance at last week's peak at 8615. A close above that level would also clear the highs formed during May at 8587 and 8591 (which form the top of a potential left shoulder). The hourly pattern for the S&P 500 in Chart 2 is pretty similar. This week's pullback didn't quite reach my downside target at the May low near 880. The current bounce, however, still remains below last week's high at 927. The May high occurred at 930. The S&P needs to clear both numbers to give more credibility to this week's rebound.

Chart 1

Chart 2

NASDAQ BOUNCES OFF MAY HIGH ... While the Dow and the S&P 500 bounced off their May lows, the Nasdaq Composite bounced off its May high. The hourly bars in Chart 3 show the COMPQ bouncing off chart support along the 1760 level. That's a positive sign for the Nasdaq and is reflective of relative strength in the technology sector. To give more credence to that bounce, however, the Nasdaq needs to clear initial overhead resistance at last week's high. Chart 4 shows that level to be at 1837. A close over that level would undoubtedly give a boost to the rest of the market as well.

Chart 3

Chart 4

MOVING AVERAGE LINES ARE HOLDING ... Last Friday, I wrote that the ability of the S&P 500 to stay above its 200-day average would determine the size of any market pullback. Chart 1 shows the S&P 500 ending the week back above that line (after dipping below it earlier in the week). The 50-day day average has also moved slightly above the 200-day. Both are positive signs. Chart 6 shows the Nasdaq Composite bouncing off its 50-day line, which reflects its relatively strong performance. Keep in mind, however, that the 200-day lines on both charts are still dropping. An upturn in the 200-day lines is necessary to confirm the recent upside breakouts. I remain of the opinion that the stock market has bottomed. Within that context, however, I also believe that the spring rally has come too far too fast and is in need of more corrective action or a period of sideways consolidation.

Chart 5

Chart 6