Tomorrow and the Next

Tuesday, the S&P logged an impressive reversal and closed near session highs at 1277. The rally was led by financials, with the XLF gaining more than 5%. The SPX has rallied 6.4% in six sessions, closing above its 20 moving average. The rally has come on decent volume and appears healthy, as long as it consolidates. If the market continues to rise without pausing, the move will be unsustainable more more vulnerable to a nasty reversal. Watch for consolidation over the next couple of days.

Financials appear to be overbought and the XLF is bumping against resistance. The index is up 34% since last Tuesday. The 22.50 level was support in mid-June, then it was taken out and served as resistance on June 25. This level coincides perfectly with the 50 moving average, which was reached on the high tick of today’s session.

SPX Support Levels
1226 ~ support the past 2 days
1200 ~ intraday bottom put in on Wednesday

SPX Resistance Levels
1273/74 ~ old support that is now resistance
1291/92 ~ old support that is now resistance, also 38.2% retracement

Over the Next Week or Two

The S&P is in the midst of a bear market rally. Such rallies tend to be strong and short, which is certainly the case so far. This rally should have legs towards the 50 moving average, but needs to consolidate. Without an adaquate pause, the rally is likely to fail.

After That

The S&P is in a bear market, and all rallies must be viewed as counter-trend moves until we see confirmation that a bottom has been put in. The long-term outlook is dependent on the price of oil and developments in the credit markets. High energy prices are probably here to stay and it will take time for our economy to adjust. The financials and housing sectors are not out of the woods. The financials will not bottom until major bank failures come to fruition.

The Market Outlook is updated as the charts fill out and provide more clarity.