Last week put this rally at one of those short-term turning points. A number of markets are challenging critical ceilings or testing major support levels.

That’s likely to keep investors nervous, and the markets jittery, until the trend resolves into continued upward movement through the ceilings or a correction back to support.

In my opinion, as long as the dollar continues to drop–and it is down in overseas markets as a write this on Monday morning–that will provide enough support to prevent anything but a mild correction. Stock markets around the world have been moving up as the dollar falls as investors decide that it’s worth taking on a bit more risk  now. That leads them to sell low-risk U.S.Treasuries and buy stocks.

Right now the ceiling and support aren’t that far apart. Which also argues for a correction that’s small in points and that perhaps stretches out to a week or two in duration.

The technology- and small-bank-heavy NASDAQ Composite index, for example,hit overhead resistance at its September high and early 2008 low near 2200. (The index closed at 2154.) Support isn’t too far away at 2040 but last week the market showed signs of taking a breather.

More worryingly to me, the Dow Jones Transportation Index (DJT) weakened last week. That’s a sign of underlying doubt about the strength of the economic recovery predicted for the first half of 2010. This index is heavy on issues such as railroad stocks that are extremely sensitive to the ups and downs of economic activity.

A major theory of technical analysis (the Dow theory) says that in a rally the Dow Jones Industrial Average and the Transportation index should both be hitting new highs. A divergence, where the Industrials continue to hit new highs but the Transports don’t, is one of the first signs that a rally is starting to fade.

The Dow Jones Transportation Index has, so far, failed to take out its September highs,and that’s another sign that we might be in for a short-term correction.

Even if you don’t follow or believe in technical analysis, knowing what technical indicators are saying about the market is important. A significant number of investors do move money about in response to these signals, making them important signals–even if they’re only self-fulfilling prophecies–for short-term market direction.