SUMMARY:
- Good news from many sources helps stocks continue their break.
- SP500, DJ30 hold their Friday resistance breaks, forcing shorts to cover some more.
- Success begets challenges as indices, fresh off the breakout, deal with next resistance.

Friday’s break higher is Monday’s continued gain. 

Friday SP500 and DJ30 followed NASDAQ’s lead, breaking through the top of the August/October trading ranges. It was expiration so there was an asterisk next to the move, but turns out there was no need to worry as the indices continued their advance, posting another solid upside advance.

The News

There was plenty of news to attribute to the move. Ahead of the weekend speculation centered upon the EU and what Germany would agree to with respect to a new plan for the bailout. Well there was no news, and the market apparently viewed that as good news. Again there was word that ‘hard work’ was underway and apparently a good effort is at least enough for the stock market.

China news was a bit more substantive. There were several reports that suggested China’s PMI would be better than expected, and that was taken as the gospel. The Chinese PMI is not out mind you, but some other reports suggest it will post growth for the first time in four months. That had stock buyers and sellers attention as well as the commodities markets. Indeed, copper posted its best 2-day advance in 6 months or something along those lines. Good news from China and everyone feels better, even if it is just anecdotal evidence at this juncture.

Earnings are always a good market mover, and Monday the focus was CAT. CAT beat expectations handily and it raised its guidance saying no recession ‘worldwide.’ That is an important distinction because CAT said last time it felt that there would be a recession. It also is non-specific. There could be a US recession still and not impact CAT that much. After acquisitions, CAT is the largest producer of mining equipment and that segment drove CAT’s results. Of course there is very little domestic US mining so that means foreign markets are driving those sales. Indeed, CAT’s earnings demonstrate the bifurcated economy. Those companies that sell overseas such as CAT and MCD as seen last week with its earnings perform very well. Domestically they are not doing as well, and neither all the small businesses making up the bulk of US domestic economy. This is nothing new, but it certainly gets lost in the shuffle rah-rah over the multinational company earnings.

M&A arose once more with a pair of deals. CI announced a buy of HS. ORCL decided to embrace the cloud after dissing it earlier, acquiring RNOW. Those two acquisitions again piqued investor interest. It is always after stocks rally these are announced. Of course that is just timing; the deals are broached when things are bad and by the time they get to the point of announcement a lot can change.

All of this activity provided plenty of morning push to stocks to continue their moves higher.

Short Covering helps drive the day.

Friday DJ30 and SP500 broke higher, following NASDAQ. Monday they did not roll over as sometimes happens after a good expiration move. Instead they drove deeper past the August/October range, extending the breakout and of course pushing already toward next resistance.

While volume was disappointing on both exchanges, that is somewhat normal for short covering. Yes at least some of the action Monday was driven by short covering. Shorts were watching to see if the Friday upside stalled. They could move in at that point or at least hold pat on their positions. When the move continued with some early strength and did not test in any significant manner, they had to throw in and cover some more positions. The break forced some covering, and the continued move Monday forced some more.

Leaders from good patterns.

It is easy to call a rally after a selloff short covering. There always is some short covering in the start of every rebound. It can be the entire answer or it can just be the preface to the long buyers stepping in. The move Monday was not all short covering.

We are watching and playing a slew of different stocks from different sectors that formed the rounded bottom patterns during the August/October market trading range. Cups, double bottoms, rectangles. You name it, they were forming them. The common theme: nice consolidations of the July and August selling that refused to give any more ground and indeed show momentum building as MACD puts in a divergent bottom.

Many of those were breaking higher Friday and they were breaking higher Monday. Nice, solid breaks on good volume. Those are the stocks that are providing some new backbone to the market even as the leaders in the first run, e.g. AAPL, struggled last week. These are good moves from solid patterns. They are performing well with their initial breaks.

And yet, more resistance.

Of course the indices’ success is also their problem given the selloff and the series of resistance levels it left in the past. SP500 broke through the August/October range, and in two sessions it is already at the next resistance marked by the March and June 2011 lows. SP500 broke through the initial March lows. It is now points away from (about 10) from the June low at 1265.

Breaking that level buys SP500 the entry to the next range, the one from 1265 to 1350ish. The latter number represents the shoulders of the February to July head and shoulders top. Of course SP500 is not in the range yet; still has to crack 1265ish.

NASDAQ is through its June low and is now bumping the February and April interim lows at 2705. It is inside its upper range, however, and is simply working on resistance levels inside the range. Techs in the fall; this is their time and they are moving higher.

DJ30 is just past its June low and is tapping toward the 200 day SMA. 12,000, just 77 points away, is some resistance; 12,250 is more (closed at 11,913).

The indices are moving well. At the same time they must deal with their success in terms of the next resistance. From one trading range, to a breakout, and now the possibility they run right into next resistance and get tossed back. For now, however, they have solid stocks breaking higher from solid bases to push them higher. It may not result in a break to a new high, but a trade well into the next range is not out of the question as these stocks make their breaks and continue higher.

Still have to watch for the next story out of Europe or if China’s PMI is not as solid as anticipated. News is still driving this market, but US stocks are trying to regain some control, and these small bases with the breakouts help wrest some of the guiding winds from the foreign economies.

TUESDAY

Economic reports resume here in the US Tuesday with Case-Shiller August Home Index and Consumer Confidence. Confidence likely bounced given the stock market rise; should shadow the bounce in Obama’s favorability. Gasoline will spike back up, however, given oil’s spike through 90, and that will wear on the consumer just when you don’t want it to do so, i.e. at Christmas.

Big picture the market could easily stall out the move well before the holiday season, but with the crop of stocks breaking higher off their bases there is more upside here before things get bad. That does not mean no pullbacks; this break higher was solid and the indices are bumping next resistance, DJ30 and SP500 in particular. Another push upside and they may need to take a breather.

Thus while we do have some new upside plays, many have jumped the past few sessions and the entry is not as good as you want. A bit of patience to let this move continue and then show a test would do us well for additional positions. Remember, the market made the break and those are often tested. We went ahead and picked up new buys on the breakout given the types of patterns we were playing, that is the nice rounded bases that provide the push for the breakout versus stocks that already ran a long way. Of course some got away from us on the move; they always do as they break higher quickly. A test gives new opportunity, however.

Still not looking for any new highs on this move but we will reserve our personal opinions to just theorizing; a useful exercise to keep you honest in the market and preventing that one out of left field from catching you in the back of the head. You still, however, have to take what the market gives, following its lead versus your gut. Check the gut at the door; does you no good in the market.