Happy hump-day, folks. Though stocks didn't follow-through too much on yesterday's implosion on Wednesday, in a lot of ways that's actually more bearish than another sharp pullback. The merely-feeble bounce effort early on in the day proves the bulls weren't willing to pour back into stocks, even when there was a glimmer of hope for a bounce. Instead, they squandered the opportunity for a quick recovery and mostly yielded to the bears again. SCN Elite Opportunity Free Alerts Get premium select stock picks via email and mobile text alerts from our SmallCap Network Elite Opportunity Team. It's 100% FREE! No strings attached and no credit card required. Click here to sign-up today! I know that's a little counterintuitive, but the market hasn't been rational in decades. Remember how I compared the market to a Rorschach test a couple of weeks ago? I'm applying the same idea here, but on an intraday basis. You can tell a lot about how traders are thinking - and what their conviction levels are - by watching how the tide turns over the course of the day. Like I said, the bulls had a chance to get the ball rolling again this morning when a glimmer of hope appeared, but they just shrugged it off. We'll look at the details in a moment below. What I really want to talk with you about today is something that apparently struck a nerve (in a good way) with a bunch of you yesterday. Small Cap Stocks Poised for Renewed Strength In Tuesday's newsletter we pointed how out Sam Stovall, chief strategist for Standard & Poor's, was conditionally-bullish on large cap U.S equities based on the notion that the U.S. dollar could fall back from its recent record-breaking rally. See, a weaker dollar would make U.S. multinational companies marketable again. The strong U.S. dollar is really starting to crimp business from foreign buyers of U.S. goods just because overseas customers can't afford to buy our stuff thanks to lousy exchange rates. Just for some perspective on how absolutely-friggin-crazy the U.S. dollar has been, take a look at our long-term chart of the U.S. dollar index. I don't disagree the U.S. dollar could fall back somewhat, which would have a beneficial, uplifting effect on not just large cap earnings, but on the earnings outlooks themselves. An improved outlook alone could prove bullish for equities, allowing stocks to continue to "grow into" their currently-frothy forward-looking valuations. The question is, what could plausibly reel the dollar in? For that matter, can the dollar be reeled in? From where I sit, the dollar, inflation, and interest rates are trapped in a complicated love triangle. Not unlike a Rubix cube, fixing one will adversely goof up one of the other two. Or, what if the dollar doesn't budge at all from current levels? We can't rule anything out. While a persistently strong dollar would mean more misery for U.S.-based multi-nationals that rely on business from overseas trade partners, for many small cap stocks that DON'T rely on foreign sales, it could be a real boon... at least for their stock prices, since those companies will be the only ones offering real growth to investors. Add it to the list of reasons to focus more on small caps this year and less on large caps. In fact, even if the U.S. dollar pulls back more than a little, I still don't see how large U.S. multi-national corporations are going to do what anyone could consider a thriving business. Never even mind the fact that small caps are already technically poised for some renewed strength after lagging for the past several months. Here's an updated version of the chart we first showed you back on February 23rd. Not a whole lot has changed, but there's no doubt on this chart that small caps have been underperformers. Knowing nothing lasts forever, I have to believe it's time for a little cyclical rotation out of large caps and into smaller stocks. Just something to think about as you're making your bigger-picture plans for the rest of 2015. On that note, while the bulk of our earnings-based analysis has been on the S&P 500, today's discussion is a natural segue into a comparison of the S&P 500 and the S&P 600 Small Cap Index's earnings trend and outlook. Look for that data later this week. Now, let's dissect today's action and talk about what it means. Hope is Fading In the interest of brevity, we'll just dive in and let the charts do most of today's talking. Starting with the daily chart of the S&P 500, we can see despite the modestly bullish start to Wednesday's trading, the bears were persistent, dragging the S&P 500 down not only to a loss for the day, but to a close just below the 100-day moving average line (gray) at 2042. Each potential floor that's crossed makes it tougher to bounce back. Though I'm still expecting at least one more bullish recovery effort before any downtrend really takes hold and guides us to "the" bottom, we have to wonder if the bulls' unwillingness to make any sort of real effort today has squelched the last of the optimism needed to get the market back into an uptrend (and it was on pretty thin ice already). The glimmer of hope we still have with this chart is how the VIX seems to be having trouble getting above its 50-day moving average line (purple) at 17.0. Maybe the bulls have drawn some sort of mental line in the sand there. When we zoom out to a weekly chart we can see today's four-point pullback has gotten the S&P 500 in contact with the lower edge of its long-term trading range. This would be a great spot for the bulls to make a stand if that's what's in the cards. The only flaw with that assumption is that the VIX is still nowhere near a key ceiling around 21.0 that we normally see when the market is making a trade-worthy bottom. The NASDAQ Composite is in a pretty good downtrend here, and unlike the VIX, the VXN doesn't seem to have any problem pushing past its key moving average lines. Note the composite is about to bump into its first major floor - the lower 20-day Bollinger band at 4823. There's a thick layer of potential support all the way down to 4718 for the NASDAQ. Zooming out to a weekly chart of the NASDAQ Composite we can see what likely sparked this weakness - a bump into a long-term rising resistance line (dashed). More than that, however, we can see the VXN also hasn't popped yet, which would normally signal a bottom. Honestly, I get the feeling it's the NASDAQ Composite telling us where the most plausible floors are. The key moving average lines plotted on this weekly chart have both been reversal points before. Given that history, we can reasonably expect them to be support lines again. My best guess at this point is, we probably have to go ahead and test the lower floors from here - we've already taken on too much water to just shake it off. For the S&P 500 that's 1992, for starters, and for the NASDAQ that means a trip back to 4760, give or take. I doubt we'll move there in a straight line, and there's no assurance the bleeding will actually stop there. I want to use those levels as my first checkpoint targets though, at which we'll take the market's temperature again. That would only be about a 6% correction from the S&P 500's recent high, which isn't anything to sneeze at, but it's hardly the kind of move that hits the market's "reset" button good and hard. We'll be back at it tomorrow, so be sure to check in.