The major averages held support at key short term support levels early this week and then bounced as we near the end of the 2nd Quarter next week. The Dow so far has held support above the 8200 level after encountering resistance at its 200 Day EMA (green line) near 8800. Currently it could be developing a potential Head and Shoulders Top pattern with the 1st Shoulder at 8600. If a 2nd Shoulder does develop then the Dow should encounter resistance next week near 8600 with support remaining near 8200 which will act as the Neckline.
The S&P 500 which stalled out just above its 200 Day EMA (blue line) held support early this week at its 23.8% Retracement Level near 888 calculated from the 667 low to the 956 high. Meanwhile it also may be developing a potential Head and Shoulders Top pattern as well with the 1st Shoulder at 930. If a 2nd Shoulder does develop then look for the S&P 500 to encounter resistance near the 930 level next week with the a key support area around 880 which will act as the Neckline.
As for the Nasdaq it held support at its 200 Day EMA (green line) early this week near 1750. Also notice its 50 Day EMA (blue line) is also nearing the 1750 level as well so this area will continue to be a key support level to watch over the next few weeks. If the Nasdaq attempts to move higher next week look for resistance to occur at it previous high near 1880 which could lead to a potential small Double Top pattern if it stalls out at that level.
Finally keep an eye on the Volatility Index (VIX) as it has become very oversold on a Weekly basis as investors have become very complacent as it has dropped from the 90 level back into the mid 20's. The 2 Period RSI has now closed below the 15 level for 3 consecutive weeks in a row which has been a rare occurrence the past 2 1/2 years as it has only happened on 4 other occasions (points A). Each time the 2 Period RSI has closed 3 weeks in a row below the 15 level this has been followed by a top in the S&P 500 so this is something to be aware of.
Now that doesn't mean the S&P 500 is going to sell off severely and retest its early March low however it does mean we could see a consolidation/pullback period which may last a few months with support coming in at one of the main Retracement Levels calculated from the 667 low to the 956 high. The 38.2% Retrace is at 846 (green line), 50% Retrace at 812 (blue line) and the 61.8% Retrace at 777 (brown line).
In the longer term it would be far more constructive for the major averages to go through a healthy pullback accompanied by diminishing volume rather than just heading higher from their current levels on poor volume. For example if we go back to the 2002-2003 period notice the Dow formed an Inverted Head and Shoulders pattern with the 2nd Shoulder in early 2003 having much lower volume associated with it as compared to the 1st Shoulder back in the Summer of 2002. This was then followed by a strong rally from the middle part of 2003 through the early part of 2004 in which the Dow gained 45%.
Now if we look at a current chart of the Dow one could say that the 1st Shoulder occurred in the Fall of 2008 near 7400 with the Head being the March low of this year. If the Dow would pullback to the 7400 level at some point on lower volume then that could lead to another favorable Inverted Head and Shoulders pattern so time will tell whether this plays out in the long run or not.
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