Stocks suffered a case of euphoria interruptus Monday, as a seemingly unstoppable climb abruptly reversed in the final 90 minutes of the trading day.

After trading as high as 9003.27, its first trade above 9000 since Aug. 27, 2002, the Dow Jones Industrial Average closed up a relatively paltry 0.5% to 8897.91. The S&P 500 gained 0.4% to 967 vs. its intraday peak of 979.11. Bucking its recent trend of relative strength, the Nasdaq Composite shed 0.3% to 1590.75 vs. its apex of 1620.80.

Although much of the media's attention was dedicated to Dow 9000 and Nasdaq 1600, the S&P's attempt to eclipse 965 was far more important from a technical point of view.

In addition to representing the S&P's highs last August, 965 represents the "neckline" of a so-called head-and-shoulders pattern in the index going back to its lows in the fall of 1998. By closing above this neckline, the S&P invalidated the head-and-shoulders pattern, a bearish chart formation characterized by two outside peaks (the 1998 summer highs and August 2002 highs) and one higher peak (the 2000 highs) in the middle.

Some technicians had suggested the rally since mid-March was merely another bear market interlude unless the S&P surpassed 965. Among them was Phil Erlanger of Erlanger's Squeeze Play, who dubbed such an accomplishment "the first step in turning around the long- and mega-term status of the market," i.e., ending the market's long-term bearish pattern.

However, the S&P's failure to sustain its intraday momentum could signal a false or "marginal breakout" of that key resistance point. In other words, the S&P's close above 965 is mitigated by Monday's internal dynamics.

"The key will be how the market handles the next cycle of fear ... whether it be a fear of heights, a fear of economic ails or a fear of geopolitical events," Erlanger wrote. "We continue to favor a hedged position until the market can test 965 as support," which the index nearly did Monday.

It's All Good ... Until It's Not

Early on, there wasn't much fear of anything, except maybe missing the rally. The bullish crowd was ebullient, thanks to a better-than-expected report from the Institute for Supply Management; bullish developments from biotech favorites Genentech ( DNA) and ImClone ( IMCLE), which closed off session highs but still up 6.6% and 19.6%, respectively; a merger between software makers PeopleSoft ( PSFT) and J.D. Edwards ( JDEC); plus supportive comments about the dollar by President Bush, which pushed the euro to $1.1749 from $1.1770 late Friday, although up from its intraday low around $1.1720.

Many would argue the stock market needed no fundamental rationale for falling from technically overextended levels that became egregiously so at Monday's intraday peak. But the afternoon swoon was attributed to crude futures surging above $30 per barrel and heightened geopolitical concerns after MSNBC reported that four U.S. soldiers were "briefly detained" by Iran. Also, semiconductors presaged the broader market's late-day weakness.

After trading as high as 387.80 early on, the Philadelphia Stock Exchange Semiconductor Index flatlined at midmorning, even as major averages hit new heights, before turning south at about 2 p.m. EDT. The SOX closed down 2.7% to 372.06 amid notable weakness in Advanced Micro Devices ( AMD), which fell 4.5% after being downgraded to sell by Banc of America Securities, and Intel ( INTC), down 2.2% after Pacific Crest Securities cut its earnings estimates. National Semiconductor ( NSM), Linear Technology ( LLTC) and Maxim Integrated ( MXIM) were among other big percentage losers in the space, which is often viewed as the leading indicator for information technology overall.

The Big Question

Several sources observed Monday that the stock market is currently exhibiting its historic propensity to frustrate and confuse as many participants as possible. Those short who covered positions on Friday or early Monday are now kicking themselves. Similarly, anyone who bought the "breakouts" -- be it Dow 9000, S&P 965 or Nasdaq 1600 -- is questioning the wisdom of those trades.

With the caveat that humans are prone to error, here are some thoughts from two market watchers who've been quite proficient of late.

"The market is susceptible to a pullback," Rick Bensignor, chief technical strategist at Morgan Stanley said midday Monday. "Underinvested portfolio managers are hurting, and with such good momentum on the upside, they could keep pushing. But there's enough stuff saying this could be a con job, and we get a pullback more severe than people expect."

This "stuff" includes excessive optimism -- as suggested by various volatility and sentiment indices -- the market's technically overbought condition, as well as the divergence between new 52-week highs, which peaked a few weeks ago and started to turn down prior and major averages hitting new highs intraday Monday. ( RealMoney.com contributor Helene Meisler has written extensively about this.)

Besignor established a medium-term target of 965 for the S&P back in November and raised that to 973 on April 10, a target he reiterated Friday and again Monday morning -- a call that looked much better as the session progressed. Midafternoon, he suggested the index could fall back into the 930 to 940 range fairly quickly, which would generate a lot of consternation among traders who got long above 950.

Conversely, the technician said the risk of getting out now is that the S&P continues higher into the 1050-1075 area, which would represent a 38% Fibonacci retracement of the S&P's decline from its 2000 peak to its October trough. In addition, that's the area from where the index broke down last May. (Notably, the Comp reached comparable levels Monday, having traded almost exactly to its intraday peak of June 3, 2002.)

"In general, I'd rather be a net seller," he said, recommending those inclined to bullishness buy calls here rather than common stocks, in order to benefit from the increased volatility he foresees.

A similar note of caution, but not outright bearishness, was offered by Jeffrey Saut, chief equity strategist at Raymond James.

Early Monday, Saut reiterated comment from a week ago, when he wrote about the potential for a "blow-off" top in the Dow producing a "look" above 9000 -- another call that looked better as the day progressed.

Late Monday, Saut offered a definitive "maybe" to the obvious "Is that it?" inquiry.

"I don't believe fundamentals justify it, but this is a liquidity-driven rally with too many dollars chasing stocks," he said. "I don't want be short here."

Saut suggested the market likely will pull back for three to five sessions before rebounding. "How they act in that secondary move up tells you a lot," he continued. "My guess is we fail to make a higher high and establish the high for the summer."

However, he's not betting on a major pullback, at least not right away, because breadth indicators had been very strong for the nine sessions ending Friday. On Monday, gainers led 2 to 1 in Big Board trading, and upside volume was 65% of the 1.7 billion total. Advancers led by a scant 17 to 15 in over-the-counter trading, and upside volume was just 52% of the 2.5 billion total.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.

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