This column was originally published on RealMoney on Jan. 29 at 11:56 a.m. EST. It's being republished as a bonus for readers. For more information about subscribing to RealMoney, please click here.

The major indices are bent but not broken after a week of harsh whipsaws and reversals.

Indeed, the weekly charts look better than expected, considering the intensity of selling pressure during Thursday's painful downturn.

But market bulls will head into February bruised, beaten up and reluctant to take on fresh exposure.

The late-week reversal highlights the importance of the Nasdaq's failed breakout earlier this month.

You might recall that the index rallied to new highs while the S&P 500 index and Dow Industrials remained stuck in congestion.

But that breakout failed just before the Martin Luther King Jr. holiday weekend.

Pattern failures rarely shift course, especially when they're getting tested for the first time.

Wednesday's rally brought the Nasdaq Composite right to the failure zone, where it rolled over and collapsed on Thursday.

This downside pivot confirms that resistance level and sets the stage for further weakness in February.

Institutions unloading inventory across a wide variety of sectors drove the nasty selloff.

Even recent leaders, such as retail and biotech stocks, couldn't escape the carnage.

But this remains a sideways market, albeit a volatile and sloppy looking one.

It's a twitchy environment that's unlikely to reward either side of the ticker tape in coming days.

I tripped over this trendline on the Nasdaq 100 Trust ( QQQQ) weekly chart two weeks ago. Notice how the uptrend reversed off resistance of rising highs that goes all the way back to early 2004? This suggests the seven-month rally is now over and we'll eventually move into an intermediate correction that lasts well into the middle of the year.

The seasonal correlation of the weekly highs from year to year is also instructive. The highs printed during the third week of January 2004 and just before fourth-quarter triple-witching in December. The early 2006 top was struck on Jan. 13. These well-aligned numbers suggest we've hit the time window for another significant reversal.

Rangebound markets can yield good trades, but the current pattern looks jagged and unstable. Ominously, the Nasdaq 100 Trust might be carving out a broadening formation, better known as a megaphone. This is a notorious stop-buster, feeding on rational positions taken on both sides of the market.

But tops take time to form, and this one is still under construction. The good news is that the Nasdaq and the blue-chip indices still trade above their January lows, with support holding at the 50-day moving averages. This suggests that bulls might take back control of the tape in the short term and trigger yet another swing back toward the broken highs.

That uptick could come sooner rather than later. This is the final week of January, and the window-dressing crowd might lift prices between now and Thursday. I'm curious about where index prices will stand by Friday's closing bell. Those weekly levels will be quite instructive, especially after the upcoming Federal Reserve meeting and monthly labor report.

The positive sentiment that underpinned the rally is drying up with each failure to hold the highs. Honestly, are you ready to carry a broad portfolio of long positions after getting your stops blown out repeatedly? More likely, long-term buyers will become short-term scalpers this February, jumping back to the sidelines on every whiff of selling pressure.

We've learned useful lessons during the recent turmoil. Clearly the most urgent one is to avoid chip stocks at all costs. The group has bashed technical signals at every turn, failing rallies and then holding firm after breakdowns. The best advice in this rogue's den is to take your money elsewhere, whether you're a value player or a time-tested short-seller.

We also learned the considerable risk of playing trading strategies that have lost their edge. This is in line with my bull-market genius column from last week. This market will not reward the buying or selling mentality that dominated the trading environment last year. Unfortunately we still don't know what's really going to work in 2007.

I'm still casting a hopeful eye on the retail sector, which has now entered a counter-seasonal time of year. As I noted several weeks ago, this underperforming group has acted very well this January, despite the calendar. Unfortunately, the Retail HOLDRs ( RTH) stalled out last week after testing the July 2005 high.

This is the key level it needs to mount in order to break out from a massive sideways pattern that started in 2002. The current pullback should hold near $100. A breakdown from that number would negate the progress made since the beginning of January, so let's keep our fingers crossed and hope the sector finds willing buyers.

In conclusion, it's time to pull up a chair because this frustrating environment could last well into the second quarter. It certainly wouldn't be a surprise after the strong rally off last summer's lows. Remember the old market adage, "The bigger the move, the broader the base"? Simply stated, stocks and indices might need a long rest after the big rally.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Retail HOLDRs to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Farley had no positions in any of 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, 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 has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from

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