A bearish weekly key reversal occurs "when some index (in this case the S&P cash) makes a new high and then pulls back to a lower low than seen the week before, and then ends the week in negative territory." While a weekly key reversal may very possibly be seen this week as well, for the moment we have several daily key reversals. A daily key reversal occurs when an index makes a new high and then takes out the prior session's lows and closes down for the day.

That happened in the S&P cash on Tuesday, and again it wasn't just some minor new high. It was a multiyear high at 1310.88, just a fraction of a point above the prior high from March 16. From there a pretty good selloff followed, taking out Monday's low by a good margin. No signs of a weekly key reversal yet. But if the S&P drops below the 1281.58 level any time this week and closes down for the week -- below 1307.25 -- (which won't be too difficult), then we'll have another weekly key reversal as well.

Of course, there were other bearish developments on Tuesday.

For one, I'd certainly rate it as bearish that the S&P futures (June) failed to confirm the slightly higher high in the cash. The futures, in fact, made a perfect double top, with the recent high from March 16 at 1321.30 (see the first chart below). This might not have been so negative if the S&P cash hadn't made new multiyear highs and turned down. The fact that the futures couldn't confirm the new high sends a negative message, as well as the reminder that it's the futures, and not the cash, that are ultimately in charge.

Now let's add the key reversals in the Dow and Nasdaq Composite. On the Nasdaq, the pattern was particularly dramatic as there was also a tiny gap from Jan. 12 (at 2331.36), which finally got filled on Tuesday, and it continued just higher enough to take out the prior highs (at 2332.92) by .03 before collapsing to new lows for the day.

That's most (but not all) of the bad news. Now here's some good news.

The June S&P may have already satisfied its retracement requirements (at least the essential ones). Not only has this contract now filled a couple of nearby gaps, but early Tuesday it pulled back to the area of the prior highs (basis June) at the 1311 level before the pop back up to the double-top highs. That 1311 level, of course, corresponds to the old high in the March contract at the 1301 level. So that was a minimum retracement objective satisfied in that initial pullback.

After making that double-top high at 1321.30, it was no coincidence that the S&P then sold off to new lows and found support at the 1305-06 level (see first chart below). That level corresponded with the old highs in the cash at the 1295 level also from Jan. 11. So two of three retracement objectives were satisfied yesterday. What's the third? A look at the continuation chart below (the second chart) graphically tells that story.

Double Top in the S&P Futures

As you know, the S&P March contract topped out back on Jan. 11 at the 1301 level. Though the June contract has now revisited the equivalent highs seen at the 1311 level, it hasn't tagged the highs seen in the March contract at 1301. That is, it hasn't printed 1301 in the June contract. This isn't a necessity, but we often see it. And given the Bearish Key Reversals seen Tuesday, it's a pretty good bet we will see this level (eventually) tagged by the June contract, just as the expiring March contract returned to the prior highs seen in the old December 2005 contract. This is just part of the symmetry that the S&P brings to the table.

Once the S&P has returned to the 1300 level, then the prior highs will have been revisited even on the continuation charts, which normally is about all that is mandated, and the market can continue back up. Will it? Maybe. There are of course other problems, as seen below in my third chart featuring the NDX.

S&P Futures Continuation Chart

The NDX has been the laggard index and it continues to struggle. Notably, it has been unable to return to its prior highs, and it's having a tough time clearing the 1700 level. Last week, after poking its nose above 1700 on Thursday, it was again turned back. Then Tuesday it got back up to the 1707 level but stalled shy of its Feb. 2 gap (again) and turned sharply lower.

So that's the first order of business for the NDX. If it can get above Tuesday's high near 1708 and at least close above the 1700 level, then it has a shot of getting up to its first big target, the ever-present Feb. 2 gap at the 1713 level.

A move back up to fill that gap is probably the best-case scenario for the NDX in this time frame, and quite frankly, it's a bit of a long shot in here as the market was due for a breather and this sector is underperforming everything else. But if by chance it can get up there to fill that gap, then we have another moment of truth. If it can go a couple of points higher, then the move could be for real. Otherwise, it's just a countertrend bounce to fill that gap and little more, and for short-term traders, it'll be another great shorting opportunity at the filling (or almost filling) of that gap.

On the downside, there is still that March 13 gap at the 1648 level beckoning. And though I'm not looking for that gap to get filled right away, it wouldn't be such a bad thing if it were filled. Here, the scenario is just the converse of the overhead Feb. 2 gap (highlighted above). Any pullback to fill the gap that holds in that area, and then turns back up, has a high probability of being a buying opportunity. On the other hand, if the gap gets filled and the NDX goes even a few points lower, then it's probably headed for a retest of the double-bottom lows at the 1633-34 level. And at this stage, that may not be a good thing ... as the third (or is it the fourth?) time down might not be the charm.

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