Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.
After two days of extreme uncertainty, stocks yesterday managed to put together a solid rally. A little more visibility out of Europe as Greece cancelled its referendum coupled with a rate cut from the European Central Bank inspired investors to buy stocks, or at least to cover some shorts.
When the closing bell rang in New York, the S&P 500 index closed up 1.88% for the day while the Russell 2000 small-cap index rallied almost 2.5%. Yesterday’s gains pushed the S&P 500 back into the black by 0.28% for 2011, and the Nasdaq Composite into the black by 1.7% for the year. European indices, such as the German DAX, remain more than 10% in the red for the year.
If we take a closer look at the technical picture of the S&P 500, we note that it remains well within that 1,200-1,300 range I’ve been discussing, which also roughly coincides with the area between the 50-day and 200-day simple moving averages.
Much, if not all, of the near-term direction in the market is in the hands of European officials, so making any proclamations beyond a couple of days seems silly. The best guess at the moment is to find reference levels to lean against. To me, 1,300 or a smidge above on the S&P 500 looks like a good level to call a top to this bear market rally.
Banks lagged for the better part of the day yesterday, but in the final lap made up ground to close the day near the middle of the pack. The sector as viewed through the chart of the Financial Select Sector SPDR (NYSE:XLF) found support above the 50-day moving average, which roughly coincided with the 38.2% Fibonacci retracement of the early October to late October rally. Banks remain the front-and-center focus on the corporate front; however, should we get a further rally over the coming weeks, it may well be that the financial sector stands out as a relative outperformer.
After getting beaten up in the first part of this week, the EUR/USD forex cross also managed to get back on its feet yesterday, which is in line with the positive correlation the cross has been displaying with equities. As such, I am keeping a close eye on the EUR/USD again. Should it run higher with equities in coming weeks, it may well find resistance around the 1.42 level, which corresponds to a downtrend line from the May highs. That, in turn, would likely mean an end in the rally for equities.
All in all, as discussed above, we remain in a choppy sideways market that can be played by the quick trader if stop-and-profit target levels are strictly adhered to. For the long-term investor or part-time gamer, the current environment is best spent on the sidelines.
