Yesterday’s huge rebound following three days of selling was based solely on news from abroad and high expectations for a jobs plan from the Obama administration. 

The major issue in the euro zone was the legality of German bailouts. That issue was decided in favor of the loans, but the court ruled that future payments must be approved by the parliament, which could delay further payments. The decision caused a jump in the German DAX index of 4.1%.  

As for the Obama plan, most political observers think it will be DOA. Despite a proposed payroll tax cut, the plan is so similar to the rejected plan of 2009 that it will probably not be acceptable to Congress.

Technically the assumption is that yesterday’s rally is just a correction in a bear market and the very low volume, as compared to the percentage advance, is in line with that reasoning. Despite a rally of 2.47% on the Dow Jones Industrial Average and 3.04% on the Nasdaq, volume lagged with just 954 million shares traded on the NYSE and 511 million on the Nasdaq. This indicates a lack of institutional participation with high short covering.

Bear market rallies are often violent reactive bounces following days of sharp declines. And many reverse at, or slightly above, the 50-day moving average, now at S&P 500 1,250. Other points that traders will watch for signs of a reversal are 1,200 (near yesterday’s high and close) and 1,230 (high of Aug. 31), as well as the uptrending bearish resistance line (heavy red dash) now at 1,240. Note that the momentum indicator is already overbought. Even though it could become more overbought, it is primed for a reversal.

With the Republican debates of last night, the address to Congress by the president, and the opening of the NFL season in a shortened holiday week, there is much to divert public interest from the market. However, it is the institutional traders that move markets, and it is they who will determine when the selling resumes.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

• See Serge Berger’s Daily Market Outlook: Sorry, Bulls, It’s Still a Bear Market
• See Sam Collins’ Trade of the Day: Sell GD Before the Next Big Decline
• See Serge Berger’s Trade of the Day: Your Prescription for Trading Walgreen