Monday's fall was a relief. The stock market had been becoming closer to long-term overbought the last two weeks and Monday's decline has allowed for powerful gains in the weeks ahead (it doesn't take too much to relax a market that is near overbought in the long-term timeframe). Even though this may be the final leg in the uptrend before a substantial fall, we believe that the gains in the weeks ahead will be large.

Yesterday the low of the NASDAQ Composite was just above the recent breakout point. We would have preferred for the index to hit its support line before rebounding, but it is still quite possible that the pullback is over and that the NASDAQ is headed to new 2006 highs. The other way to look at the most recent two day advance is to think of Monday's pullback as the beginning of a small correction, the last two days being a corrective move higher, and the index falling below Monday's low in the coming days to end the correction near the 2350 area (second support line from the top).

You can notice how the NASDAQ Composite's recent advance put the RSI into overbought territory for the second time in two months. This suggests that the long-term trend will continue to be higher. The market has proved its strength again.

The Russell 2000 was not that strong on the first advance in the month of November, but with this next advance most likely pushing the index well above all-time highs, we believe that the the RSI indicator will become overbought very soon and the Russell 2000 will begin to lead again.

The S&P 500 may still fall back to the 50 day moving average, but we don't feel that the index will decline any further. A fall to the 1360 area would make the chart pattern much more bearish and therefore we believe that the S&P 500 should be able to stay above its 50 day moving average.

We believe that a new uptrend is about to emerge. The pullback was small, but most of our indicators are pointing to continued strength in the days and weeks ahead.