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Technicals Increasingly Bearish
By Mike Paulenoff, MPTrader.com (www.mptrader.com)

Today's action is all about the oversold condition of the short-term indices juxtaposed against the very bearish-developing intermediate-term indices. We did have a rally earlier in the morning, but that rally was quick and it reversed and in the case of the Nasdaq indices they went to new lows for the move that started on Monday.

The E-mini June Nasdaq went down to 1415.50. Not surprisingly, the 1415 area is where the rising 200-day moving average is. So that's containing the damage so far. But as oversold as the intraday work is on the E-mini S&P and E-mini Nasdaq, the fact that there's no rally coming out of this, especially when you figure at the end of the month there may be some window dressing, is pretty amazing ... in a negative way. The market has been unable to rally after it has declined so much in 4 days of action. Just to give you a parameter on that, the decline this week in the June E-mini S&P was from 1146 to 1106, and in the E-mini Nasdaq was from Monday's peak at 1502 and got to a low of 1415.

So, with all that selling pressure, where is the recovery? What I posted on our MPTrader.com Web site's subscription pages this morning and yesterday were the intermediate-term charts that suggest that in the case of Nasdaq, in particular, we're building a major top. If we break through the 1415 area on the E-mini June Nasdaq (the 200-day moving average) on a Friday and close below it, then I think we're going straight down to the next critical level, which is 1365. That is the horizontal neckline of that entire top pattern that goes back about 7-8 months, and a break there could be devastating.

So it'll be very interesting to see what happens in the last 1-1 , hours of trading today. At this point, we're actually hoping for a rally so we can get short. If the E-mini June Nasdaq can get up to 1430-35 or higher, we'll try to establish some short positions over the weekend.

In the E-mini June S&P, we're hoping it can get up to 1120-22, but it peaked at 1119 earlier today, just shy of where we wanted to be short. Right now we're looking for another possibly short-covering pop at the end of the day that can get us up into those levels again perhaps where we might enter short positions as well.

The reason we would do that is that, once again, the intermediate-term technicals have rolled over and are increasingly suggesting a bearish resolution to the intermediate-term chart pattern.

As for the QQQs, they also are approaching and challenging very important support levels. Earlier in the week they got up to 37.29, and today we find the Qs hitting a low of 35.17. The 35.05-35 area is very important. It's the confluence of the rising 200-day moving average with the trendline that goes back to March 2003, so we're talking about a 13-14 month trendline.

If the Q's manage to slice through 35, that would be a very significant break, and I think there would be downside follow-through that gets you to 34 or 33.95. That's the horizontal neckline of an 8-month top pattern that must contain the damage or there'll be some severe weakness that transpires if 34 is taken out and sustained.

So right now it's difficult to sell weakness. We're looking for some sort of bounce to 35.50, and if we can get it great; if we can't we'll have to manage risk that much more carefully, because selling weakness, as you know, can be a very difficult thing to do, even when the primary trend is down. At least now we have the micro and near-term trends both down.

So we'll see what happens. If there's an upside surprise, only a move above 36.40 would argue that this week's down-move is neutralized.

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