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Recent Rally at Critical Point

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It’s a bull! It’s a bear! Actually, it’s neither . . . yet.

That’s what Wall Street’s graph-gazing technical analysts tell investors wondering whether the stock market’s rally since early April--the broad market’s strongest advance in almost a decade--flags the birth of a new bull phase or is just another short-lived rally in an ongoing bear market.

“It’s neither. I would not label it a new bull market or a bear-market rally,” said Jonathan Dodd, technical analyst at brokerage Morgan Stanley & Co. For now, he calls it simply a “tradeable advance.”

Though many chartists say major indexes haven’t necessarily seen their absolute lows in the bear market that began more than a year ago, most said they were fence-sitting while leaning more toward the idea that prices could continue to rebound in the near term.

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That case was made stronger Friday, when stocks rallied broadly despite the government’s report that the economy in April saw the largest number of job losses in a decade.

Though the report seemed to dramatically boost the risk that the economy could fall into recession--doing even worse damage to already depressed corporate earnings--investors bought stocks on the assumption that bad news, once again, is good news: A weaker economy will almost certainly mean more interest rate cuts by the Federal Reserve. And there is almost nothing the stock market likes better, in the long run, than lower interest rates.

The Dow Jones industrial average rose 154.59 points, or 1.4%, to 10,951.24 Friday, and the Nasdaq composite index gained 45.33 points, or 2.1%, to 2,191.53.

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The Dow has surged 16.6% from its two-year low reached March 22. The Nasdaq index is up 33.7% from its 30-month low reached April 4.

With many companies reporting dismal first-quarter earnings amid the weakened economy and analysts still cutting estimates for full-year earnings, each rise in share prices lifts stocks’ valuations.

How much more will investors pay in the near term? A key issue now is overhead “resistance” and “supply” levels--prices at which a lot of shares could be unleashed by those who want to lock in gains or just break even.

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“Resistance is when you hit a number you could not get above” in previous rallies, though it may not be easy to explain why, said Elaine Yager, director of technical analysis at Investec Ernst & Co.

For the Dow, that is the 11,000 mark: The index has tried to rally above that level five times since October, failing each time.

The Nasdaq index has faced resistance from 2,200 to 2,400, then at 2,600, analysts said.

Supply is an element of resistance: At a certain mark in an individual stock’s rally, investors tend to rush in to take profits or make up previous losses.

Many investors are holding stocks in which they have deep losses. The Nasdaq index still is down 56.5% from its March 2000 record high. The Standard & Poor’s 500 index is down 17% from its record high, also reached in March 2000.

Given where they ended on Friday, the Dow and Nasdaq are at a critical point, analysts agree. This week’s action--and what happens leading up to and after the Federal Reserve’s May 15 meeting--could determine whether the rally can sustain itself this spring or quickly falls apart.

“It’s premature to draw a conclusion” as to whether this was a bear-market advance or the start of a new bull market, said Gregory Nie, technical analyst at First Union Securities. “We are at a juncture now where . . . the hurdles in front of us are going to become a little more difficult.”

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Chart watchers also concede that they generally focus on the short term, not the longer term. The market’s trend over the next few years will ride on many factors, from interest rates to corporate earnings to the global economic backdrop, and how those factors unfold remains anyone’s guess.

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