The stock market continued its three-day rally yesterday as Nasdaq turned profitable for the year, driven by a surge in technology stocks (up 1.9%). And the S&P 500 rose 1.3%, finishing just below break-even for the year. But can it continue based primarily on the expectations that European leaders might offer a resolution to their debt crisis this week?
Click to EnlargeThe Nasdaq led all other indices, up 2.25%, with the DJIA up 0.89% and the S&P 500 gaining 1.29%. Volume on the NYSE failed to reach the 1 billion mark, trading just 926 million shares, and the Nasdaq traded 486 million shares. Advancers exceeded decliners by just more than 4-to-1 on both exchanges.
The leading index, the Nasdaq, broke from its three-month pattern by smashing resistance at the October high of 2,667, then its 200-day moving average at 2,692. They now become the first and second support lines.
Click to EnlargeThe S&P 500 broke from its holding pattern at 1,230 and also broke the trend line at Friday’s high at 1,239. The next resistance is at the neckline break of early August at 1,260 and then the 200-day moving average at 1,275. These breaks reverse both the near- and intermediate-term trends for the 500 to “up.”
After a bleak summer, the bulls finally have an opportunity to attack the substantial overhead that was outlined as a “red zone” in Friday’s DTA. I wish I could say this will be a quick run to a new bull market, but the evidence doesn’t support that conclusion: First is the enormous overhead; next, the 200-day moving average convergence with the July trend line represents important resistance; and finally, higher volume is needed to overcome potential sellers. To put the volume number into perspective, one service noted that yesterday the S&P 500 SPDR (AMEX:SPY) traded just 64% of its average daily volume. This could continue for a short time, but it is indicative of a lack of commitment.
But a breakout has occurred, and so in the very near term (this week), stocks could continue to move higher. Short-term traders should have already covered their shorts with stop-loss orders — a policy that the DTA has advised numerous times. However, they should prepare to re-enter them later this week. The market has risen in anticipation of a European bailout plan in the order of 1.3 trillion euros that will be accepted by all common market members. Even if this unlikely plan were to be adopted, the news will be out and after a quick rally, stocks most likely will reverse from a buying climax — “buy on rumor, sell on news.”
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