Last week’s performance, with the Dow Jones Industrial Average rising 4.6% and the Nasdaq up 6%, was encouraging for the bulls. In spite of the ho-hum economic readings here in the United States, the market rallied chiefly on the news that the European leaders have been able to keep Greece from a default until at least October. But concerns over Europe also led to a breakout of the U.S. dollar, and that is because there were no genuine solutions to Europe’s problems. 

However, despite the move higher, the week’s rally lacked volume and breadth when compared to the overwhelming downside volume and negative breadth of the prior decline. And Thursday’s triple-digit rally was mostly the result of the ECB, Fed and other central banks’ coordinated intervention to stabilize the U.S. dollar.

Historically, this type of intervention has a short shelf life. Note that when the pressure eased on Friday, the buck jumped. And technically this was a positive for the dollar, since immediately after UUP closed the breakaway gap of the week before it reversed up.

The other new Fed strategy discussed last week, “Operation Twist,” where the Fed sells short-maturity bonds and uses the proceeds to buy longer maturity bonds, will not increase the amount of dollars in the financial system. It is no QE2, though, and many financial experts believe it is evidence that the Fed has run out of options to stimulate the economy.

This week it is important to focus on the behavior of the market and specifically the S&P 500 as it approaches the immediate overhead. The index appears to be moving into the major resistance between 1,230 (50-day moving average – blue line) and 1,262 (neckline break – horizontal red dash line). If it successfully overcomes this range and then attacks the 200-day moving average at 1,285 (red line) and clears it, it would be a clear win for the bulls. But if it fails, which is more likely, and does it on an increase in volume and breadth, the bears will have won a major victory. 

The chances are so strong that the current rally is merely a rebound in a bear market that short sellers should begin to enter positions, scaling them in until fully committed. But enter stop-loss orders to protect against large losses. This is a volatile market with no guarantees of success despite the overwhelmingly bearish outlook.

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: Will Stocks Revisit Their August Lows?
• See Sam Collins’ Trade of the Day: Gap Coming Up Short – Short It
• See Serge Berger’s Trade of the Day: Shorting Capital One is a Capital Idea