Technicals Suggest the Rally Isn't Over

Emotion may have gotten the best of investors last week, but technical analysts argue the charts indicate that the recovery rally may still have some legs, providing those who have missed it so far a chance to participate.

That's good news for nervous bulls who feared that the two-month run was about to end, and even better news for those underinvested who feared the advance was already over and a downturn at hand.

Since the market dropped to its low in early March, the major U.S. indices rallied sharply higher, climbing more than 30%. However, bulls ran into trouble last week, as the S&P 500 gave back 5%, and the Nasdaq Composite lost 3.4%.

The explanation for last week's decline varied daily, from normal backing-and-filling to worse-than-expected economic data. For example, Wednesday's 24-point drop on the S&P 500 and 51-point loss on the Nasdaq were pinned to a miserable report on retail sales, which fell 0.4% in April, or 0.5% excluding auto sales.

Other economic data last week certainly weren't encouraging, either. A report Wednesday showed that import prices rose 1.6% in April, the largest increase in almost a year and well above economists' expectations. Inflation at the consumer level was also hotter than many expected, as the core number on the consumer price index, which excludes food and energy, was up a higher-than-expected 0.3%.

The Labor Department's weekly initial jobless claims data showed a 32,000 increase to 637,000, above the consensus figure of 610,000, which came because of layoffs in the auto sector.

Individual stock news wasn't much better. The large number of secondary offerings to hit the market was the easy target, resulting in a glut of shares and not enough buyers. Several companies, mostly financial names, announced common stock and debt offerings, including Wells Fargo (WFC Quote), U.S. Bancorp (USB Quote), Capital One Financial (COF Quote) and Ford (F Quote), among others.

Before the end of last week, the bullish chatter that was so loud in April had turned mostly to whispers. But once the exuberance and the doom-and-gloom is cleared away, the charts tell technical market analysts that it wasn't the bad news that swayed the market last week. Instead, it was all a lot of noise that was more of a sideshow than a real market-moving force.