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The Elephant in the Room
Nice rally, but there is a small problem (click to enlarge):

Looking at this chart, it is easy to see why the market bottomed in October 2002: the economy had resumed growth. Growth; remember that?

The chart also shows how this recession makes the last one look like an itsy bitsy little blip. What are the chances that this bear market bottoms sooner than the last one? Zero!

Slop
The megaphone patterns on the IWM and QQQQ that I mentioned yesterday certainly didn’t turn out to be bearish. And neither did this one that popped up on the SPX 5-minute chart Thursday afternoon:

Nevertheless, these are chaotic patterns that don’t belong on any self-respecting rally chart. If the SPX had made a nice bullish ascending triangle pattern before it took out 826.84, I wouldn’t be critical. But this slop? Bah!

I think these megaphones are an indication that there isn’t a steady bid under the market, and a sign that the topping process has begun.

Vix Falling Wedge
The Vix has a bullish falling wedge pattern developing on its 60-minute chart:

That’s bullish for the Vix, and bearish for stocks. The last time I posted such a chart was on January 27th. The SPX made a top the next day. This pattern isn’t as perfectly formed as the last one, but it is another sign that we may be approaching a top.

R2K Drama
Here is a weekly chart of the Russell 2000:

Notice how the late October 2008 rally topped out at the 61.8% Fibonacci level (blue line and blue arrow.) Now the R2K is approaching the 78.6% level (red line and red arrow) which is at 454.24. So, the R2K may only be ten points away from an epic resistance level.

MacOS
It is very unusual for the McClellan Oscillator to get so overbought and stay that way for so many days. I wouldn’t be long here with Larry Kudlow’s money.

Support levels:
826.84 – (New) The top of the Gap of Doom, and prior resistance.
804.00 – This level has been weakened and can’t be counted upon.
797.00 – Still in play, but weakened also.
791.37 – Wednesday’s intra-day low.
780.00 – Was resistance before the plunge to 666.
768.54 – The Geithner Gap from Monday morning.
752.44 – November 20th low close.

Resistance levels above are:
839.43 – The final resistance level before the Gap of Doom on Feb 13.
851.00 – (New) Was resistance on Jan 26th and Feb 4th.
875.01 – The February 9th peak.

Other Important Levels
800.58 – Weekly low close from 2002 (October).
815.26 – Monthly low close from 2002 (September).
823.09 – A close above makes a monthly bullish engulfing candle.
826.84 – Gap of Doom. A weekly close below would be a red flag.
828.51 – 78.6% retracement from Feb 9th peak using closing prices.
830.45 – Ditto, but using the extreme high and low.

Holding above the 78.6% retracement level will convince many traders that a run to 875 is likely.

If you have any other important levels we should keep an eye on, please post them in the comments.

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Yesterday, I mentioned that the IWM had not broken into its Gap of Doom. Here is what that looks like on the daily chart (click to enlarge):

SPY, QQQQ, and XLF have all penetrated or exceeded their G.O.Ds, and the IWM’s failure to do so so far is a red flag on the rally. And now look what’s happened on the 15-minute chart:

The dreaded “broadening top” pattern, a.k.a “megaphone”. From page 153 of the textbook:

“…nine times out of ten, they carry bearish implications.
They appear most often at or near an important topping out of the trend.”

The problem with megaphones is that they are such chaotic patterns that it is hard to tell which way they will break. One way is to look at the swings inside the pattern and see if they are falling short of the boundaries. So, the blue arrow on the chart points to the top of Wednesday’s last swing, which didn’t quite make it up to the upper red line. That is an indication that the next swing down might penetrate the lower red line.

Also, as I mentioned in the comments Wednesday afternoon, the QQQQ developed a megaphone on its 5-minute chart starting around 10am. That pattern is still in play.

SPY is oversold on the 60-minute slow stochastic, but overbought on daily. That sounds like a recipe for sideways if the megaphones don’t blast the rally. This doesn’t strike me as the best time to fall in love with the rally.

Goldman Sachs said to ditch the banks on Wednesday. It hardly seems fair when the banks haven’t even retraced one lousy fib level yet:

I’m adding 752.44 as an extreme support level for Thursday and Friday. Take a look at this Fibonacci Fan chart:

I connected the dots of the March 9th and March 12th closes to create the Fan (red line). The fan lines generated seem to match support levels nicely. Look at the blue arrows running up the blue 50% line. Then when the rally downshifted, it dropped to the purple 61.8% line. So, I’m thinking that a big sell-off might drop us down to the green 78.6% line. If such a downshifting happens soon, it would coincide with the red dotted line, the level of the November 20th low close, and that would be a logical confluence level to halt a sell-off.

Yesterday, I listed 826.84 as a resistance level, and the SPX topped out on Wednesday at 826.78. How’s that for precision?

Support levels:
804.00 – This level has been weakened and can’t be counted upon.
797.00 – Still in play, but weakened also.
791.37 – (New) Wednesday’s intra-day low.
780.00 – Was resistance before the plunge to 666.
768.54 – The Geithner Gap from Monday morning.
752.44 – (New) November 20th low close.

Resistance levels above are:

826.84 – The top of the Gap of Doom, and rally peak so far.
839.43 – The final resistance level before the Gap of Doom on Feb 13.
875.01 – The February 9th peak.

While the market is open, please limit comments to the market and events that may effect it.