Courtesy of the short sellers the rally that started on October 4th continued another day yesterday as they got squeezed a little more and were forced to close their positions.  The seven day rally tally on a daily closing basis now comes to 10% on the S&P 500, nearly 16% for the Russell 2000 and almost 12% for the Nasdaq 100. 

The S&P 500 closed above the 1200 level but did find resistance at 1220 and sold off for the last 90 minutes of the trading session.   Near-term the oscillators such as the stochastics are overbought, which  doesn’t mean the rally can’t continue but makes it a little more difficult to continue at this pace.

Yesterday we took a look at possible retracement/support levels on the Russell 2000 so let’s see what they may look like on the S&P 500.  The hourly chart of the index flags the 1165, 1150, and 1140 areas as possible zones of support.  We will have to evaluate this with volume, time, oscillators, volume, candlesticks and more as we go along but for now these are areas of support to watch.   

Yesterday I also pointed out the broken medium-term chart of the 10 year U.S. treasury note, which I take to be a bullish development for equities, at least for a few weeks.  In the very near-term however it seems that the 10 year bonds may have formed a little double bottom and look to rally back up to near the 50 day simple moving average (yellow line).  This is merely a short-term development I am looking at but it does confirm my thesis that in the immediate term stocks may be a little overbought.

The KBW Bank Index (BKX) yesterday broke above its 50 day simple moving average (blue line) and a resistance line but from a momentum perspective is near-term overbought.   Another thing to think about; JPMorgan (NYSE:JPM) rallied 18% off last week's lows and right in front of this morning’s earnings report.  This doesn’t mean a ‘sell the news’ reaction is a sure thing but it certainly increases the probability that anything other than amazing earnings and outlook will lead to at least some profit taking.

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