All it took was the resignation (or at least a pledge to step down) of the Italian Prime Minister Silvio Berlusconi yesterday and stocks rallied hard off their daily lows to close at their highs. In true risk chasing fashion cyclical stocks like financials and energy stocks led the day higher as fund managers hopped on board for a little ride in hopes of improving their year to date performance. Such strong closes have a tendency to lead to gap-up opens the following day.
Flipping right over to the chart of the S&P 500 we note that we are again nibbling at the upper end of the 1200-1300 range I’ve been discussing for the past two weeks. At yesterday’s close the index sat at 1275, as such upside is limited to about another 25 points or two percent. For most the risk/reward here is not great and I as such I don’t see the need for chasing this. For the more active trader however two percent upside, should we get it, may be well worth it as the 1300 area may act as a magnet.
The down-trend from the highs of this year comes in a few points above 1300 and could be reached. However before that is the 200 day moving average at 1272, which we just slightly closed above of yesterday.
The 30 minute chart of the S&P 500 shows the upside a little better with the triangle wedge that has broken to the upside yesterday. The gray zone may act as a magnet. The stochastics oscillator is in overbought territory but can remain so for a while longer. Stochastics and many other oscillators are best used when they show divergence to the price.
While equities rallied and are getting dangerously close to major resistance points again the dollar index has snuck above the key 76 level where it is looking to build a base. The inverse relationship between the dollar and equities remains intact and should the dollar index be able to rally off the base near 76 it should coincide with equities running out of steam.
Oil too is hitting solid resistance areas as indicated by the Oil Fund ETF (NAR:USO). Oil itself has actually rallied above initial resistance at $90 and its 200 day simple moving average, however times are volatile and I only want to use it as an indicator to the broader equity market.
All in all the outlook remains the same, equities while they may have a little upside left should soon run into resistance again. Nimble traders can play the remaining upside while longer-term asset allocators best sit on the sidelines.
