Two weeks of summer rally or three days of bounce?

07/26/2010 9:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Maybe we’ll get a summer rally after all—but it doesn’t look like a very strong or long one. Still the hope for any rally at all is an improvement over the pessimism that has taken increasingly strong hold of the market since the April high..

Watch the NASDAQ Composite Index this week to see if stocks can build on last week’s strength.Last week that index—on strength in technology and regional bank stocks—led the U.S. market.

On Friday both the Dow Jones Industrials and the NASDAQ Composite closed above their 200-day moving averages. That will build some confidence among traders who were worried that the U.S. market was about to fall another leg lower.

The NASDAQ Composite with its overweighting in technology and smaller financials--well, smaller, at least, than the NYSE’s JPMorgan Chase (JPM) and Bank of America (BAC)—is frequently the first index to signal a move to the upside. The fact that this index is behaving in a familiar way also raises the comfort level among traders. It’s always good to see the market behaving like it has in the past.

By gaining 23.58 points on Friday, July 23, the NASDAQ Composite closed above not just its 200-day moving average but also its July high of 2249.84. Granted that’s not a huge hurdle to jump but one challenge at a time. The next test is the June high at 2310. If the index can crack that level, then the current move has a chance to be more than just one of those 3-day bounces that have been so frustratingly frequent since April.

That’s not to say that all is suddenly positive in the U.S. market. The Standard & Poor’s 500 Stock Index is still below its 200-day moving average and the 50-day moving average for all three major indexes, the Dow, NASDAQ, and S&P 500, is still below the 200-day average.

The trend, in other words still points downward. It will take a cross of the 50-day above the 200-day moving average to turn that around.

History isn’t comforting on this front. Summer rallies usually don’t last much beyond the end of July. After that the season pattern gets downright ugly, history says, in August, September and the first two thirds of October.

One can hope but I don’t know that I want to put a lot of money on hope.

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