Think Greener Pastures for the Bull Are Ahead? Think Again

Stocks opened higher yesterday but faded early, and by late morning the Dow
Jones Industrial Average had fallen 120 points from its high. But stocks turned
quickly following the resignation of the Italian Prime Minister Silvio
Berlusconi. By the close, the Dow had a triple-digit gain on the hope that
Berlusconi's departure will usher in a new period of economic reform inItaly.
For the day, the Dow gained 0.84%, the S&P 500 rose 1.27%, and the Nasdaq was up
1.2%. Volume remained light with just 879 million shares trading on the NYSE and
489 million shares on the Nasdaq. Advancers exceeded decliners by about 3-to-1
on both exchanges. Click to Enlarge Click to Enlarge Yesterday afternoon's
rally popped the S&P 500 to 1,276 from its tight trading range of 1,235 to
1,273, the bounds of its 20-day and 200-day moving averages. The surge, created
by a relaxation of anxiety overItaly's financial crisis, triggered a near-term
buy signal from the stochastic, which supports the bulls for a run at the
significant resistance above the bearish resistance line at 1,285. Click to
Enlarge And so, with the focus onEurope, momentum players have again jumped on a
thread of positive news and the indices have, for the second time, run into the
heart of the major resistance zone that began forming in January. The first
attempt at this zone was made in October at 12,303, but heavy selling reversed
the drive and the index fell below its 200-day moving average where it found
support at its 20-day moving average (green line). In order for the bulls to
succeed, they must attack the July to October trendline and close above the
October high at Dow 12,303. Then they must overcome the heart of resistance,
which spans 12,303 to 12,675 a tall order for a stock market that consistently
records lower volume on advances than on declines. The rally from the October
low to the October high was about 19%, and as pointed out earlier, it is not
unusual for a bear market rally to exceed 20% before reversing and crashing to
new lows. Note the following from prior Daily Market Outlooks: Oct. 7: "But it
(S&P 500) could continue north to the neckline at 1,260, and that would be more
than 17% above Tuesday's [Oct. 4] low." Oct. 17: "Bear market rallies are
notorious for short-covering surges that often run 20% or more from a new
low." Oct. 24: "Seasoned investors have experienced similar bear market
rallies many times, and our readers were warned that an exuberant bear market
rally could run to the neckline break at S&P 1,260 and perhaps even to the
200-day average now at 1,275. Buyers must now confront the broad band of
resistance that looks like an NFL Red Zone." Click to Enlarge By backing off
from the focus on October, readers will see the enormous overhead confronting
those who believe that we are about to enter the greener pastures of the bull.
We've traded both the bullish and bearish side of this market for short-term
gains. (And my colleague, Joe Burns, has had enormous success doing just that .)
But losing sight of the fact that the bear is still in charge of the longer term
could be a serious and costly mistake. Todays Trading Landscape To see a list of
the companies reporting earnings today, click here . For a list of this weeks
economic reports due out, click here .