Investors took a rest again yesterday, following last week’s gain of almost 6%. But despite the need to consolidate gains, there were buyers in high-quality issues, and so the Dow Jones Industrial Average jumped 56 points, which was about 40% higher than the S&P 500 and over four times the advance on the Nasdaq. Volume was again light at just 820 million shares traded on the NYSE, and advancers led decliners by a small amount.

As for the overall direction of the stock market, I’d like to go back to Charles Dow’s explanation of the components of the market. The overall trend (bull market/bear market) is likened to the tides of the sea, slowly go in and out. Sometimes you can’t really tell the direction of a tide unless you observe it over a period of time. But there are waves that you can see, and often they appear to be with the tide and other times against it. And within the waves are rivulets that you can see move back and forth over the waves. You have no trouble seeing them, but they have no influence on the direction of either the tide or the waves.

As noted, the tide is compared to the overall long-term trend of the market, incoming is likened to a bull market (see major bullish support line) and outgoing to a bear. The waves are like the intermediate trends. Sometimes they flow in the major direction of the market and other times against it, and rarely they will terminate at the end of a tidal surge (note the major intermediate corrections). The rivulets are like the short-term market trends (green arrows). They don’t influence either the tide or the waves, but can be the lifeblood of traders who try to determine their short-term fluctuations.

Currently, and since March 2009, the tide has been coming in, i.e., we are in a bull market. And with last week’s rally, the intermediate trend, or waves, of the market have turned in the same direction as the tide — up. As for the rivulets, well they are currently flowing with the waves, but appear to be slowing, and the wind is beginning to push them against the tide and the waves. Lacking direction they will most surely move away for a short time, but can easily reverse and move toward us with the change in the wind.

Naturally, there are countertrends, currents and whirlpools that influence investors. In the Daily Market Outlook, we try to concentrate on identifying the trends, as well as major influential sub-structures that may point to a change in trend. Thus, last week I noted that we should pay special attention to the financial sector.

I noted that the first test was when the Financial Select Sector SPDR (NYSE: XLF) broke through $15.24. I said: “So far, so good. The real test will come when the XLF reaches the broad resistance at $15.40 to $15.80, and then there is that open gap that could close with a single day of selling and negate yesterday’s positive move. This is a key index to keep on your radar screen since it could tell us whether or not this week’s rally can be sustained.”

The XLF has made a run to the noted resistance and fell slightly yesterday. Will it test the breakout at $15.24 and close the gap at around $14.98 to $15.08? Or will it continue higher and break from its bearish channel? Currently it appears to be retreating.

As for the PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP), I said, “The inverse relationship between the dollar and precious metals and stocks is an accepted proposition.” I noted that, “if the index is able to close above the bearish resistance line, now at $21.50, the dollar could be headed for a dramatic trend reversal up with the implication that stocks and commodities could move down.”

It is now testing its major bearish resistance line and is reaching the end of the apex of a descending triangle — we should soon know the next direction of the dollar.

Conclusion: The overall trend (tide) is still strongly up, and it appears that with the break of the S&P’s June high, that the intermediate trend has turned up. However, following such a dramatic move higher on relatively light volume, it is likely that a shallow correction back to support at the S&P’s 50-day moving average line at 1,317 and the Dow’s at 12,378 might be in order before resuming the intermediate uptrend.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

• See Serge Berger’s Daily Market Outlook: The Longer the Rally Lasts, the Harder Stocks Will Fall
• See Sam Collins’ Trade of the Day: GLD Could be Your Golden Ticket
• See Serge Berger’s Trade of the Day: Whole Foods Looks Like a Healthy Buy