The market is hitting zones of resistance that could stall the month-long recovery effort and even trigger a deep retracement. But its unlikely the major indices will return to the bear market lows any time in the second quarter. This mixed picture should translate into an uneven ticker tape that demands aggressive risk management in order to book profits.

Traders and investors have spent the last two months reacting to a bungee-jump market that carved out massive "V" patterns on the major averages. It's instructive to note that the S&P 500 closed out Tuesday's session right at the inception point of the February selloff. So, despite media hoopla about the recent rally, the index has barely made a dent in the longer-term downtrend.

S&P 500
eSignal

This becomes more obvious when looking at the long-term S&P 500 chart. Note how the index dropped into a declining channel after the October crash. Although the March rally eased overly bearish sentiment, the weekly pattern just shows an oversold bounce from the lower to the upper end of the channel. This points to a mean reversion event, rather than the birth of a new bull market.

The three blue lines surrounding price action in the last six months denote the 38%, 50% and 62% retracements of the 1974-to-2007 bull market. In early March, the index bounced just 26 points shy of the 50% retracement at 639, which I believe will contain the downside in this bear market. However, the lack of a single higher low since that time increases the likelihood of an eventual selloff that tests that historic level.

In addition, the index still hasn't mounted intense resistance generated by the violent lows posted in October and November 2008. The current uptick has probed those levels, but the weekly pattern clearly shows that they remain strong barriers holding back the recovery effort. Add in overbought technicals after the buying surge, and it's easier to understand why the rally has paused right here

How will this all play out in the weeks ahead? In sum, it feels like we've entered a period that's strikingly similar to the post-Bear Stearns low in March 2008. The market ticked higher into June after that reversal, although low volume and a choppy tape characterized the price action. Of course, there was money to be made during that oversold rally, and it's no different this time around.

Nasdaq-100
eSignal

Tech stocks have led the upside during this rally, and this is a big problem, because the entire group will move out of positive seasonality in another month or two. In addition, it makes no sense to look for sustained tech growth at this advanced stage of the economic contraction. So why has the Nasdaq-100 taken over the leadership reins?

As it turns out, the reason for this superior performance is perfectly logical. The index has maintained a stronger technical pattern than the S&P 500 or the Dow Industrials throughout this bear market. In addition, it has already printed a higher low, unlike the S&P 500. This resilience has naturally drawn in more buying interest during this rally, which in turn has translated into higher percentage gains.

The Nasdaq-100 index has rallied well above the February swing high where the S&P 500 remains stalled this week. It has now pushed up to a five-month high and is nearing major resistance at the 200-day moving average. Also, note how the fund has moved into upper end of the volatile range carved out in late 2008 and is hitting weekly Bollinger Band resistance.

Taken together, the next 100 points of upside will be a lot harder to achieve than the last 100 points. But I have a nagging suspicion the index won't be starting a deeper correction until it spikes into the 200-day moving average, because that level tends to act like a magnet whenever price is trading close to it.

Russell 2000
eSignal

I'll round out this discussion with a look at the small-caps, because I find the Russell-2000 especially interesting right here. The index poked above the 50-day moving average at the end of March, pulled back and then gapped higher last week. Compare the small pattern carved out in the last two weeks with failed rallies at this level in January and February.

This analog points to a fresh pool of relatively aggressive small-cap buyers who are willing to bid up the speculative sector. This is a nice change of pace, given the extreme risk-aversion of the last six to 12 months. However, this relative strength needs to prove itself, just like the S&P 500, because the index hasn't posted a higher low since July 2008.

This sets up an odd conflict, because the Russell 2000 will need to sell off through the 50-day moving average in order to print a double bottom. It also points out the major challenge with long-term prediction at this point in the bear market. In a word, we're seeing notable improvement after the massive decline, but the technical outlook remains so convoluted that it's impossible to sound the all-clear signal.


Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.


Know What You Own: In early trading on Wednesday, the most active stocks included the PowerShares QQQ ( QQQQ), Intel ( INTC), Cisco ( CSCO), Bed Bath & Beyond ( BBBY), Juniper Networks ( JNPR), Research In Motion ( RIMM) and Microsoft ( MSFT).

Alan Farley is a private trader and publisher of Hard Right Edge, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of The Daily Swing Trade, a premium product that outlines his charts and analysis. Farley has also been featured in Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. 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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