The fifteen day rally in stocks has lifted the S&P 500 just about fourteen percent and managed to squeeze out a close above the 1250 mark but right at the 61.8% Fibonacci retracement line from the May to August downdraft. I showed this chart in yesterday’s morning note and after yesterday’s rally we are smack dab in the middle of the entire resistance zone marked by the gray box.
Looking over in small cap world we note that the Russell 2000 rallied almost 22% over the same time period and right here right now sits at a horizontal resistance line and the 50% retracement level.
Yesterday’s rally was a continuation from last Friday’s uplift that increased the slope of the rally off the early October lows. Yesterday’s rally more or less looked healthy with defensive stocks underperforming and financials near the front of the pack. The resistance levels mentioned on the above charts are all over the place however and the industrial stocks as represented by the SPDR Industrial Sector ETF (ARCA:XLI) are a good example.
News out of Europe on a potential grand solution to the debt crisis remains few and far between. On Wednesday however their deadline for a solution will be upon us and regardless of what the content of their proposal is, markets will be volatile. We may witness the most volatile few days of trading for 2011 in the coming days and high cash levels in traders’ portfolios will be rewarded as it allows pouncing on opportunity with a much clearer mind. It is also conceivable to see a classic ‘buy the rumor and sell the news’ reaction later this week. After all risk assets over the past three weeks were bid up in anticipation of some sort of better than expected news and should the headline either not be believable or potentially worse yet, get moved to a later date, traders may be quick to take profits and lean to the short side.
The EUR/USD too is at an important level and remains one of my key tells for the broader equity market; if and when this currency pair finds resistance and heads lower equities should follow suit not too much later. There is however a massive short interest in the EUR/USD that could lead to a continuation of the rally before we see lower levels again.