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Another Sharp Rally May Precede a Retest

Longer-term charts are broken, but rally could take S&P 500 to 1,240


Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.

Another day, another rally in U.S. equities. That’s three for those keeping track. Comments by U.S. Treasury Secretary Timothy Geithner at a New York hedge fund conference, and the continued support by France and Germany of  the Greece bailout, kept investors bidding stocks higher. While the afternoon session resulted in somewhat of a short squeeze, whereby those with short positions were forced to buy back stocks, the overall price action was positive nonetheless.     

The daily chart of the EuroStoxx 50 (the top 50 European blue-chip stocks) left a bullish candle with a long tail on Tuesday, and showed follow-through buying yesterday with a solid up day. Purely from the price action this could lead to higher prices still.

EuroStoxx 50 Chart

On the chart of the S&P 500 we note that price has now again wiggled itself up to the middle of the bear flag. While the overall price action was strong yesterday, the weak close is worth pointing out: The index lost 1% in the last 30 minutes of trading and couldn’t close above 1,200. 

SPX Chart

I touched on the semiconductors the past two days and noted that their recent relative outperformance could be a telling sign for the broader market. Sure enough, the market followed and semiconductors themselves rallied even more.

Look at the chart of Intel (NASDAQ:INTC) below, which had a successful bond auction yesterday afternoon. But be aware that both the 50-day and 200-day moving averages are coming into play here as potential resistance. 

INTC Chart

In the bigger picture we remain seeing bonds better bid. And while gold is showing early signs of tiredness, it too is holding up well for the time being. These continue to be signs that fear hasn’t left the building.

We must remember that the longer-term charts are broken, and while this rally could get the S&P 500 to snap as high as 1,240, the likelihood of a retest of 1,100 or lower remains high. Politicians hold the wild card for better or worse, and we must respect the potential for sharp bear market rallies at any point.

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