At this time there are a few things to watch closely over the next week or two which may steer the market significantly in one direction or the other. The first thing to watch is the Volatility Index (VIX). Since the November 21st bottom in the market the VIX has dropped significantly by almost 50% (points A to B) and is nearing its 200 Day EMA (blue line) which is near 40. The last time the VIX dropped 50% or more was from late October through early November (points C to D) which was followed by a sharp correction in the S&P 500 (points E to F) which led to the November 21st low. Thus if we see a sharp upside reversal develop in the VIX over the next week or two this could lead to another down move in the market with a possible retest of the November 21st lows rather quickly in the early part of 2009.
The second thing to watch is the Financial sector specifically the Banking Index (BKX). Notice the BKX downward trend line (black line) and upward trend line (brown line) are converging which means a substantial move is approaching. In order for the market to continue higher the BKX must break solidly above its downward trend line. However if the BKX were to break below its upward trend line then a retest of the November 21st low will likely occur which would have a negative impact on the market.
As far as the major averages the Dow has stalled out near the 9000 level which is at its 10 Week EMA (blue line) and 23.6% Retracement Level calculated from the October 2007 high to the recent November 21st low. Over the next few weeks one of two things may develop. Either the Dow will rise above the 9000 level and attempt to rally up to its 20 Week EMA (green line) near 9600 or it will breakdown and eventually retest the November 21st low just below 7500.
The Nasdaq still hasn't reached its first area of upside resistance at its 10 Week EMA (blue line) near 1615 which will likely act as a resistance area next week. If the Nasdaq can rise above 1615 then the 23.6% Retracement Level comes into play near 1675. Meanwhile if the Nasdaq does stall out near its 10 Week EMA and then comes under increasing selling pressure this may eventually lead to a retest of the November 21st low at 1295.
As far as the S&P 500 it has encountered resistance near its 10 Week EMA (blue line) around 920 and has a secondary area of resistance at its 23.6% Retracement Level near 938 (calculated from the October 2007 high to the recent November 21st low). If the S&P 500 can rise above the 938 level then the next upside resistance area would be at its 20 Week EMA (green line) near 1020. Meanwhile if the S&P 500 is unable to rise above the 920 area and begins to sell off look for an eventual retest of the November 21st low which was at 741.
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