The resiliency of the stock market continued yesterday as a rally that started mid-day proved to be relentless and pushed stocks to finish higher on the day.  That now leaves Santa-Rally hopefuls holding onto their mistletoe as major U.S. indices are on the verge of breaking near-term resistance areas.  The caveat however is that just one red day would take the edge away from the bulls and hand it over to the bears.  That speaks to a) the narrowing of the trading range and b) the binary world we find ourselves in. 

On the sector front technology led the way higher while energy lagged and financials cozened-up with the middle of the herd.  Besides the complete lack of volume for the second straight day the other thing sticking out was the lack of participation in the rally by the EUR/USD FX cross.  From a risk-on perspective this sniffs of a bearish divergence, which may however be something bulls can overcome if they can gather enough of a following to squeeze another couple hundred basis points out of the major global equity indices. 

A quick glance over to the daily chart of the S&P 500 reveals several things;

First, note that the index still trades within the 50 and 200 day simple moving averages.  Also note the resistance line connecting the tops of 2011 coming in just north of the 1300 mark.  And thirdly note triangle/narrowing trading-range.  A break above 1280 may lead to further upside while a break below 1220 could lead us lower.

Volume on the New York Stock Exchange the past two days has been meager and trending lower the past two weeks.

Much like the S&P 500 the semiconductor stocks as represented by the Semiconductor HOLDRs Trust (NAR:SMH) still trades below the 200 day simple moving average and the downtrend line from 2011.  It won’t take much to cause a breakout in this group or stocks and from a momentum perspective the Stochastics have plenty of room higher.  Also just like for the S&P 500 however, one solid red candle would negate the entire near-term breakout potential.

For a little perspective please have a look at the chart of the Nasdaq 100, which displays the index now bumping into the 2400 area for the fourth time this  year.  The more a level gets tested the weaker its support/resistance.  On the margin that’s a bullish sign but until a break to the upside of this resistance area it’s also not worth acting upon.

Last but not least, lest we forget that Europe remains front and center as far as market moving headline is concerned and as such we would be wise to keep a close eye on their debt and equity markets.  The German Dax stock index is firmly wedged between its 2011 downtrend line and some horizontal support that also coincides with its 50 day simple moving average.  Should that support level break the 5000 level will likely be targeted again.

It’s a binary tape for sure and I for one remain doing as little as possible until better risk/reward setups peak through.  Cash is king, unless it’s frozen or gone missing at/by a rogue broker or bank.  And that itself is a sign of the times.

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