The major U.S. indices politely responded to the title of last week’s Market Outlook, “Odds Favor a Continued Rally in Stocks,” with a broad-based advance. They were led by the small-cap Russell 2000, which gained 4.3%.

#-ad_banner-#However, despite a nice rally over the past few weeks, the Russell 2000, S&P 500, Dow Jones Industrial Average and Nasdaq 100 remain down between 2% to 6% for the year.

All sectors of the S&P 500 finished last week in positive territory, led by energy and financials, up 6.5% and 4.5%, respectively. Defensive health care brought up the rear, gaining just 0.2% last week. 

Asbury Research’s own metric shows the biggest inflow of ETF-related investor assets went into financials in the past week and into energy in the past month. The biggest outflow of assets during both time periods came from health care.

Market Testing Formidable Resistance
Last week, I said the bullish chart pattern in the Dow Jones Industrial Average targeted a move to 17,500. The blue-chip index finished last week 2.8% below that objective.

For that target to be met, though, the broader market, as represented by the S&P 500, must first break a formidable band of overhead resistance at 1,994 to 2,023. This resistance represents the mid-November and mid-December lows and the 200-day moving average, a widely watched major trend proxy.  

A sustained rise above 2,023 would clear the way for more near-term strength and a potential test of the next overhead resistance level at 2,104 to 2,116. On the other hand, a bearish reversal from this band of resistance would warn that the index’s August decline is still intact and resuming.

Investor Fear Key To Near-Term Market Direction
An indirect but reliable way to determine whether investors have enough conviction to push the S&P 500 above resistance is by monitoring investor fear. One way to do this is by tracking the Volatility S&P 500 (VIX). Specifically, I use the VIX’s 50-day moving average as a baseline to determine whether the market is fearful or complacent. 

The VIX declined below its 50-day on Feb. 19. As the chart shows, this level of investor complacency helped facilitate the S&P 500’s October-to-December advance.

As long as the VIX remains below this moving average, currently situated at 21.71, I expect overhead resistance in the S&P 500 to be broken, which should also help clear the way for the Dow to meet its 17,500 upside target.

Conversely, if the VIX reverses higher above 21.71, it would suggest overhead resistance in the S&P 500 is likely to hold and that a deeper market decline is imminent, perhaps similar to the one that occurred between December and February.

Bonds Warn Of Intermediate-Term Weakness In Stocks
In the previous Market Outlook, I said benchmark U.S. interest rates were likely to be a key influence on upcoming stock market direction due to the positive correlation between the yield of the 10-year Treasury note and the S&P 500. Therefore, if we can correctly determine where long-dated Treasury prices are headed, it should help us get a better handle on what to expect from the stock market heading into the second quarter.

In late January, the iShares 7-10 Year Treasury Bond (NYSE: IEF) broke out from a year of sideways investor indecision to resume its late 2013 advance. This breakout targets a move to $114, which is almost 5% above Friday’s close. This target will remain valid as long as IEF remains above the upper boundary of the indecision area near $107.95.

IEF moves inversely to the yield of the 10-year Treasury note, which I already mentioned is correlated with the S&P 500. Thus, an advance in IEF would indirectly warn that, minor rallies aside, a deeper decline is coming in the market.

Take Profits In Copper
Last week, I told readers that two closes in the iPath Bloomberg Copper Subindex Total Return ETN (NYSE: JJC) above its 50-day moving average, then at $24.67, would confirm a bullish chart pattern. The target was a 10% advance to test major overhead resistance at the 200-day moving average.

JJC rallied as expected last week, closing above $24.67 on Tuesday and Wednesday. On Friday, it challenged the 200-day moving average, now at $26.94, hitting a high of $26.71. 

Although copper prices may very well continue higher, Market Outlook readers should consider locking in a profit now. JJC rallied 7.7% last week and is still in the midst of a major downtrend, as defined by the 200-day moving average, that began in August 2011.  

Until the 200-day moving average is meaningfully and sustainably broken to the upside, I will consider the current advance to be a countertrend rally within an almost-five-year bear market.

Putting It All Together
The benchmark S&P 500 began this week testing a major band of overhead resistance at 1,994 to 2,023. From here, either its larger August decline should resume or we should see the index rise to test the 2,104 to 2,116 area.  

My intermediate-term outlook for even lower long-term interest rates indirectly warns of more stock market weakness, but a sustained increase in the VIX would be necessary to help trigger it.

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This article was originally published on Profitable Trading: The Key Resistance Level to Watch This Week​