Fear of Heights: Averages Facing December Resistance - TheStreet

It took some time, but most of the major indices are back near the highs they touched early last month, when their steady climb from the September trough finally lost its legs.

For technical analysts, this makes for a critical juncture. If stocks can break through these levels, they could see a nice jog higher. If not, the market may enter a more ruminative phase, and could even falter badly.

While much technical analysis often seems a kind of self-fulfilling numerology, the notion that the market often has trouble breaking through old highs has more concrete reasoning behind it. Investors who bought at the highs made a mistake and, the theory goes, are anxious to get bailed out. As the market rises anew, these investors feel they've been given an opportunity to be made whole again. They sell; this puts pressure on the stocks, and the market has difficulty advancing. If stocks get past the resistance, however, the all-clear is sounded and the market can run.

The early December highs, which both the benchmark

S&P 500 (1173) and tech-heavy

Nasdaq (2054) are near also correspond neatly with their 200-day moving averages, which in itself may not mean all that much, except that lots of investors think those averages are important, and so they are.

"The next few days are really critical," says J.P. Morgan technical analyst Nicola Merrell. Merrell reckons that the market will ultimately break higher, pointing out that the market held up during the Christmas lull, that volume has come back well in the new year, and that "everyone seems fairly happy with their positions."

But not all technical analysts are convinced the market will be able to get past the old highs -- at least initially. "Short term, the market isn't ready just yet to break out to the upside," says Fuji Futures strategist Holly Liss. She beleives a tough earnings season will give investors pause before committing capital, and that the market will end up shifting lower for a bit.

"Long term, I'm still bullish," Liss says. "The lows we saw in September are valid, and ultimately the market goes to the upside. But for now it's going to have a tough time getting through all this resistance."

On Monday, the market failed to follow through on early gains and ended the day lower. The

Dow lost 63 points to 10,197, while the S&P 500 fell 7.6 points to 1165 and the Nasdaq fell 22 points to 2037.

Heartbreak Hill?
The S&P, near its December highs and its 200-day moving average

If the market does move higher as Merrell, and Liss, eventually, believe it will, investors looking for entry points would do well to bear the idea of resistance in mind. As it moves higher, the market isn't entering new territory, but going over old ground -- ground where a lot of people who bought in last time around are getting nervous. Plenty will be only too happy to sell into rallies and get out of these investments having lost only time and sleep. If this is really a new bull market, as so many people seem to believe, then it may be a halting bull, rushing forward and skittering on back, rather than one that steadily plods on up. At least until investors begin to forget about past pain.

"The tech bubble burned a lot of people and made them very scared," says Morgan Stanley technical analyst Nora McAuley-Gitin. "Until they believe this is a sustained advance, they're just going to sit and watch."