The major U.S. stock indices aggressively rebounded last week from the underlying support levels I pointed out in the July 6 and July 13 issues of Market Outlook. The rally was led by the tech-heavy Nasdaq 100, which gained 5.5% and is now up 10% for the year, and was fueled by news that China appears to have averted its major stock market crash while the eurozone is on its way to kicking the Greek default “can” further down the road.

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Last week’s rally was led by the technology and financials sectors, which gained 4.8% and 3%, respectively. In fact, all sectors of the S&P 500 posted gains except for energy and materials, which both remain under pressure within a sluggish global economy.

The big question this week, and the focus of today’s Market Outlook, is whether last week’s rally is sustainable. 

Nasdaq 100 Meets Our Upside Target 
Two weeks ago, in the July 6 Market Outlook, I pointed out that the bellwether S&P 500 was testing major underlying support at its 200-day moving average, a widely watched major trend proxy, and said this was where its larger bullish trend should resume if still valid. Since then, the index has risen by 58 points, or 2.8%.

More recently, in last week’s Market Outlook, I pointed out that the Nasdaq 100 had just tested and held major support at 4,347, adding that, “As long as this support … continues to hold, my 4,600 upside target remains valid.” The chart below shows that my 4,600 upside target was met on Friday, which equates to a 5.7% rise in this market-leading index in just six trading sessions.

The big question for me this week is “How much more upside is there?” I say this because there are still a few red flags for the U.S. stock market out there (I’ll discuss one of them in a minute), and corrective declines often begin once initial price targets have been met as some investors take profits. 

Nasdaq Composite Sets New All-Time High  
One key to answering that question is whether the Nasdaq 100’s broader cousin, the Nasdaq Composite, as shown in the next chart, can remain above secular overhead resistance at 5,133, its top-of-the-tech-bubble high from March 2000. 

The chart shows that, following failed tests of this major resistance level in late April, late May and late June, the index finally closed 1.5% above it on Friday at 5,210. As long as 5,133, which now becomes key underlying support, contains the index on the downside, last week’s big rally in the these market-leading technology indices will be expected to continue. However, a sustained decline back below 5,133 would warn that a countertrend correction may be beginning. 

Investors May Be Getting A Little Too Carefree  
Helping to drive last week’s big rally was a lot of investor complacency, which means that investors are unconcerned about a stock market decline. Although a little complacency is a good thing since it’s necessary to help drive equity prices higher, too much complacency can be a bad thing as fearless investors are especially vulnerable to being spooked out of their skin by any bad news that could turn stocks lower.

The next chart shows this phenomenon in practice via the Volatility S&P 500 Index (VIX) alongside the S&P 500 over the past two years. The VIX finished last week slightly below 12, a level that the red vertical highlights show has either coincided with or closely led almost every near-term peak in the broader U.S. market during this period. 

Therefore, Market Outlook readers may consider keeping an especially close eye on the VIX this week. A strong rebound from 12, no matter what the cause, would indicate a nervous and vulnerable market — especially if it’s accompanied by a decline back below 5,133 in the Nasdaq Composite.

Editor’s note: Profitable Trading’s Jared Levy recently released a free report on why the likelihood of a market correction — or worse — is so high. Like John, Jared currently sees a number of red flags in the market, including many of the same warning signs he saw before major bear markets in China, Russia and even the United States. This special report covers what Jared believes is coming next… and how you can profit in the coming weeks and months. 

Putting It All Together  
Last week’s rise to new all-time highs in the market-leading Nasdaq 100 and Nasdaq Composite indices is a positive sign for the broader U.S. market heading into this week and into the rest of the third quarter. This comes on the heels of a successful test of major support levels in a number of U.S. stock market indices, like the S&P 500 and Dow Jones Industrial Average, earlier this month. 

One concern that I have, however, is the extreme level of complacency right now, especially considering the current list of unresolved geopolitical issues in Greece (debt default), China (crashing stock market) and Iran (nuclear deal) — all which have the potential to put a big scare into this unsuspecting marketplace at a moment’s notice. However, it would take a sustained move back below 5,133 this week in the Nasdaq Composite amid a sustained rise above 14.3 in the VIX to suggest that investors are collectively frightened enough to potentially undo last week’s gains. 

This article was originally published on ProfitableTrading.com: Could Complacency Reverse Last Week’s Gains?