Is The Current Rally In Stocks As Strong As It Appears?

Stocks were up today with the NASDAQ leading the charge with a gain of 3.6%. Transportation stocks were the big winners today up over 8%.

If you look at the above chart of the NASDAQ you can't help but notice the significant level of resistance we are now testing. In the lower pane is the NASDAQ advance decline line and as you can see there is a bearish divergence developing. Before I discuss this divergence, lets first walk through the last 6 months of price action.

Back in November, the NASDAQ made a higher high but the advance decline line didn't. This was a warning sign that a sell off is likely and that is exactly what happened.
On February 9th (point B) the NASDAQ was testing resistance at point A but the A/D line was diverging and once again the NASDAQ sold off. Now here we are at point C and the NASDAQ is testing resistance but the A/D line is diverging and making a lower high. This is a bearish sign just as it was in the previous two examples I just wrote about.

So here's is how I will trade this particular scenario. If the NASDAQ moves above resistance we'll probably see many of the trend followers as well as the breakout traders buying this market. That's fine as long as the market continues moving higher, however if the NASDAQ begins to head lower and closes below the trend line (blue line) I would interpret that to be bearish and a sign that the NASDAQ it about to head south.

Let's see what happens over the next few days as this key level is being tested in the NASDAQ. I do want to point out that the current short term trend is clearly up and there are no signs of weakness as of yet.