A Look at the Dow's Leaders

The Dow Jones Industrial Average has recovered most of the losses it incurred in the big selloff and is now not far from its 2007 high. This places its performance on par with the Nasdaq Composite and just behind the S&P 500, which has led the recovery effort in the past six weeks.

Notably, the Dow's multiyear breakout over 11,700 last October is still intact. This keeps the venerable index on track to eventually take out this year's highs and head toward 15,000 in the months ahead.

But price must still overcome the considerable barrier imposed by this year's high.

That might take another few months, at least.

Curiously, the first-quarter selloff now looks less ominous than last year's second-quarter correction, which took more than three months to hit bottom. What also sets 2007 apart from last year was the near-hysterical cacophony of bearish predictions. It's now obvious that price action never matched these endless doomsday calls.

But a cautious stance is required at this juncture, despite the good tidings we feel as the Dow and other indices set their sights on the old highs. Sadly, these lost levels mark solid resistance. That raises the likelihood of another sharp downturn as price approaches those boundaries.

I'm not looking for a vertical slide here. Most likely, we'll see the development of a broad range that defines the trading environment in the second quarter. With better luck, the next pullback will be shallow and hold the major moving averages at high pivot levels. In turn, that platform could set up an eventual thrust to new multiyear highs.

Expect the double-top crowd to come out of the woodwork following the next downturn. The bears are still looking for signs that this rally will fail. A well-publicized selloff, just as the major averages near their highs, will be their excuse to reload positions that have caused them grief during the endless squeeze in March and early April.

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At the time of publication, Farley had no positions in the stocks mentioned in this column, although holdings can change at any time.

Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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