Almost four weeks ago I wrote an article titled "This Rally Looks Tired"; the day after the article appeared, the S&P 500 reached its high for the rally that started on March 10. The exact timing was a matter of luck, but the signals that the rally had run out of steam were clear and many others who identified the same market conditions were cited in the article.

The question today is: If the market was tired in June, has it rested enough now to become more energetic again? The answer is complicated by the start of earnings season on Wednesday, July 8. Because of these complications, this is the obvious time to try to sort out the situation. The coming several days will go a long way to drawing a map for the rest of July and possibly August as well. I see serious stresses that will need to be overcome for the market to resume its rally.

The decline in relative strength of the S&P 500 from the high the first week of May has continued. The decline in MACD has accelerated since the June 11 article. The declining daily volume trends have continued. The behavior noted previously for higher volume on down days has also continued. The one exception (noted with blue arrows) on June 19 was not a down day, but displayed a candlestick pattern known as a "doji," an indicator of indecision in the market.

S&P 500 (SPX)

The gap up day on May 29 to close above the 200-day moving average for the first time in months (noted with the blue square) was filled with the move down on June 16. Twice in the past few weeks there have been bearish engulfing patterns for the S&P 500. These were not patterns for consecutive days, which is the traditional definition, but based on multiday patterns.

The engulfing was accomplished by a big down move starting higher and ending lower than the last major move up. These two patterns occurred for June 15 engulfing the aforementioned gap up day of May 29 and July 2 engulfing June 25. The last bullish engulfing day occurred on May 26.

There has been a lot of talk about the golden cross (blue circle) on June 23, with the 50-day moving average crossing above the 200-day moving average, coinciding with higher prices for the index over the next several days. The cross is now on life support as the index has dropped back below the 200-day moving average, well below the 50-day. As with fake jewelry, the gold has suddenly turned green.

Many have noted the head and shoulders top pattern forming for the S&P 500. That pattern is complete with the close today of 881.03. This is just below the neckline after completing the right shoulder. See Helen Meisler's July 6 discussion of this. The move down today takes us well below the correction to 895 predicted by Doug Kass on June 2.

The picture for the Nasdaq 100 is similar to that for the S&P 500, but less bearish in several details. We see the same gap up day on May 29 (blue square) and the gap fill with the decline on June 22, several days after the gap fill for the S&P 500. In the case of the Nasdaq, the golden cross and the gap up day occurred simultaneously, a very bullish sign.

Also less bearish, there were two higher volume up days for the Nasdaq (blue arrows with "higher volume" box): one (June 25) was a strong positive gap fill, removing the bearish signal of the June 22, a gap fill decline.

Although the Nasdaq chart looks much stronger than the S&P 500, I have a lot of concern for the July 7 close at 1404.78, well below the 50-day moving average.

Nasdaq 100 (NDX)

The Russell 2000, represented by the iShares Russell 2000 Index ETF ( IWM), is shown in the following chart. The index showed strength comparable to the Nasdaq 100 up to the early June top, but it has shown weakness more like the S&P 500 since the middle of June.

It is noteworthy that the two largest volume up days recently (blue arrows) had very small price advances. This lessens the importance of these days as bullish indicators.

iShares Russell 2000 Index ETF (IWM)

The Financial Select Sector SPDR ( XLF), has had a significant reversal of fortune since the June 11 article. The graph below shows that the strong uptrend to the middle of June has reversed to a downtrend with resistance at the 200-day moving average.

The golden cross (blue circle) of July 1 seems to have little significance at present. It is noteworthy that the daily volumes since June 19 have all been approximately one-third the average for the six largest volume days in May.

Financial Select Sector SPDR (XLF)

I have owned ProShares UltraShort Financials ( SKF) since the end of May. I am not planning to close the position soon unless there is a dramatic change of trend. As of July 7 the position is up 8.1%.

Just as for XLF, there is a clear trend reversal in place in the chart for SPDR Metals and Mining ( XME). I have not had positions in XME, but if I did I would sell now if I hadn't already sold on July 2 when the 50-day moving average was penetrated.

The chart for Energy Select Sector SPDR ( XLE) shows a dramatic change of trend, with some bearish signals not seen in the other charts. The gap up on June 1(blue square) was filled with a decline two days later and again another six days later. Between those two bearish fills was a spectacular hanging man candlestick.

The golden cross was a non-event for XLE. The price chart was dropping steeply right through the cross. This is a rare event and totally cancels the significance of the golden cross unless the price trend is reversed within days; it was not reversed. The price has now dropped well below the declining 200-day moving average.

Energy Select Sector SPDR (XLE)

In my article on May 26, I defined an entry strategy for shorting oil through buying ProShares UltraShort Oil & Gas ( DUG) at $17.14 at market close on June 16. At the market close on July 7, this position had gained 26%.

The anticipated pullback is now occurring. To stop this decline and stabilize the market, we need the increasing doubts about whether the recession is ending (or will end this year) to diminish. This can happen if many of the upcoming earnings announcements meet or exceed expectations, such as the disastrous unemployment situation moderating with, say, initial claims dropping well below 600,000 per week. Absent good news on either of these two fronts, I am braced for further declines.

Expanding the table from the June 11 article, a summary of the current situation and key support levels I am watching is provided below.

Support Levels

While the Nasdaq is still over 5% above the first support level I have identified, IWM is much closer and the S&P 500 is right on the verge of violating support. The next few days are indeed crunch time for the markets, especially the S&P 500.

If support levels are broken, I will increase short positions. If support is held, I will be closing the positions in SKF and DUG, probably using close stop-loss orders -- 5% from the most recent high for SKF and a little looser for DUG at about 8%).
At the time of publication, Lounsbury was long DUG and SKF.

John B. Lounsbury is a financial planner and investment adviser, providing comprehensive financial planning and investment advisory services to a select group of families on a fee-only basis. He worked for 34 years with IBM, and spent 25 years in R&D management and corporate staff positions. He also was a Series 6, 7, 63 licensed representative with a major insurance company brokerage for nine years.

Specific interests include political and economic history and investment strategy analysis. He holds degrees from the University of Vermont, Columbia University and the Illinois Institute of Technology, where he studied chemistry, physics and mathematics. He is a contributor to Seeking Alpha and his own blog, PiedmontHudson.