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Was Rally a Head Fake?

Traders say it would be a positive sign if stocks can hold recent gains, but the market is not likely to make much progress until it gets past a series of major hurdles this summer.

Maxim Group technical strategist Paul LaRosa said he does not believe the bounces in the major indices are of good quality, and are not likely to lead to new highs yet.

"I think they'll rally up, run into a little resistance, then turn down. My reason is that beneath the surface, there's a lot of deterioration," he said.

LaRosa said one bad sign is that just 16 percent of the stocks on the New York Stock Exchange were above their 50-day moving averages last week, and many stocks look in poor technical health.

He expects the indices in the next downturn to find support at 11,555 for the Dow ; 1249 for the S&P 500 and 2599 for the Nasdaq .

He said the Russell 2000 has spent this week bouncing off the important 772 level. It closed at 806 Tuesday.

"That was a very important support level. It traded down there, bounced around it, but never closed below it. That was starting on June 10, going all the way to June 20. It traded between 772 and 795 but never closed below it," he said. "If we close below that, you're going to see more selling."

He said the near-term resistance levels are 12,350 for the Dow; 1310 for the S&P; 2750 for the Nasdaq, and 825 for the Russell.

Scott Redler of T3Live.com watches short-term technical moves and he sees some positives in the recent action. But the market faces obstacles this summer and it's not likely to head to new highs until later in the year.

Among the long list of concerns that worry traders are the scheduled end of the Fed's quantitative easing program next week; weakness in the U.S. economic data; the debt ceiling and federal budget debate, and the lingering European sovereign crisis. There is also concern that companies may not sound as confident as they had during the upcoming earnings season.

Redler said some of the positives were that high-beta tech made a comeback in Tuesday's rally; buyers returned to energy stocks, and financials led the market earlier Wednesday.

"I'm more neutral to bullish, versus neutral to bearish. The way you judge the strength of the move is by the strength of the retracement," he said. "We think it's a little more constructive, but this time you have the Fed meeting and that's an event holding up the market."

"I think we have to hold above (S&P) 1280 to 1284 to keep the momentum," said Redler.

"I think there's a good chance that 1250 is the low of the year, and there's more probability that we make new highs for the year, come end of the third or fourth quarter," he said. "1250 to 1255. That's the area we're watching."

Even though he expects to see the market decline, LaRosa said it is a good time to accumulate some shares. He likes some names in the semiconductor, pharmaceutical, telecom and utilities sectors."I'm still cautious and not believing this rally yet. We're not going to implode. I just think there's a telecom stock to buy and there's a telecom stock to short. It's not a broad based rally that people should close their eyes and buy," he said."

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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