- European story start stocks downside, but they hold the recent up trendline and recover positive on . . . a European story.
- M&A again fails to spark overall market interest.
- Potential China investment in Italy helps stocks recover.
- NABE lowers its growth expectations for US 2011.
- Obama sends his bill to the Hill, using tax hikes to pay for it.
- Leaders still look more defensive, but once again other sectors are trying to set up and make the upside breaks.
- Indices hold their recent uptrends thanks to the late recovery.

It is all Europe, both downside and upside.

As it seems almost at the start of each week, worries about Europe weigh the market down. There was no terror attack, there was no Greece default (though markets place default at a 98% probability), but once again Europe hindered early trade. The ‘Group of 7′ could not come up with a consensus on how to ‘restore confidence’ in the EU, and the markets took the lack of cohesion as a bad sign. The clock is ticking on Greece, and thus each day there is no new plan (and just how many plans have there been thus far?) it is viewed as one day closer to default.

Those thoughts weighed on investors early on and futures traded significantly lower. Didn’t matter that some M&A activity in the chip sector (BRCM buying NETL) excited chips and had them leading early to the upside. Problem is, not much else was following. Jamie Dimon hoisted the American flag in decrying the plans at the Basel talks to levy a ‘world tax’ on large banks to fund projects in less rich countries. Glad someone finally said something about this most, as Dimon put it, ‘un-American’ idea. We already fund most of the UN and its anti-US activities; why allow extortion from our banks to pay for more? There I go again, digressing far afield.

Stocks opened lower, but ahead of the open futures were on the mend. Stocks hit their low, at least their early low, at the opening bell, rallying through the first half hour. That held the recent trendline off the August lows and moved the indices positive, but then the problem of holding the gains came back. Stocks struggled through the session. NABE, the small business council, came out and lowered its economic forecast for 2011 to 1.5%. Rather grandiose in our view, but more in line with reality. That didn’t do anything for stocks and they struggled below the flat line.

Then after 2:00ET a story from FT hit the wire that Italy and China were talking about China buying some Italian bonds. The thought of China acting as Italy’s white knight sparked some buying, but when the financial stations could not confirm it, stocks backed off once more. Then FT ran another story on Italy going to China to about buying its bonds, stocks renewed their bid. This time it stuck and stocks rallied to the close, making closing highs across the board.

NASDAQ 27.10, +1.10%. SP500 8.04, +0.70%. DJ30 68.99, +0.63%. SP600 +0.74%. SOX +3.03%.

As noted, that action helped the indices hold their recent trendline, and if it holds that means by definition they put in a higher low and try again on relief rally bounce number three. Nice doji action on SP500 just as last Tuesday. Chips held their patterns and started higher, and others that have formed up decent bottoming patterns the past several weeks are still in position to move higher as well. That keeps alive yet another attempt to rally stocks upside as they have done since early August. Once again the question is will they take the opportunity and will they put in more than three days upside.

TUESDAY

Economic data kicks back in but not many pay attention to import and export prices though they should. These numbers won’t reflect the recently stronger dollar, but how expensive imports are, say with oil, is very important.

The late recovery left the indices in position to continue the recent trend of 3 to 4 day rallies, perhaps this time up to the March and June lows. Leadership is still thin and suggesting economic malaise, but those stocks noted the past week that are trying to build bullish patterns are still hanging in there, and the Monday recoveries off the gap lower look pretty positive. Still have to show the moves, but if they do we are ready to move in and capture that run.

At the same time, the downside positions have not let us down. We keep banking gain on those downside pushes, reload, and then let them play out again. Enough stocks are moving both ways in this market to make money both ways as the buyers and sellers rotate through various sectors. It causes us to misstep from time to time on some plays, exiting when it turned out staying pat would work, but if you are working the probabilities you have to go with that.

In any event, we have some new upside to look at in the event these patterns form up better and participate in a move higher yet again. For now the indices are trading in a range over support. They are trying to build into a stronger upside move, but a run to that resistance from March and June will make us some good money.

The wildcard still remains Europe and when Greece folds, but the market has been dealing with that since August and has thus far held support. Doesn’t guarantee a hold on a Greek fold, but it is something we can make money off of and perhaps the market becomes somewhat used to the idea that Greece will default and thus the actual event may not be as traumatic.

Jon Johnson

Stock Splits & IH Alerts, Editor