Charts Point Lower Despite Temporary Optimism

Headlines caused stocks to rally, but volume and breadth continue to favor bears

 By Sam Collins, InvestorPlace Chief Technical Analyst

There were two main reasons for Tuesday’s broad-based rally in stocks. First, the ECB reiterated that the euro zone needs to create a banking union. Second, it was reported that Chicago Fed President Charles Evans supports additional monetary stimulus.

The rally occurred despite the fact that Fed Chairman Ben Bernanke gave no hint of any further stimulus, and that the need for a euro zone banking union is obvious but lacks backers.

At Tuesday’s close, the Dow Jones Industrial Average was up 163 points to 12,574, the S&P 500 jumped 15 points to 1,324, and the Nasdaq rose 33 points to 2,843. The NYSE traded 721 million shares versus 427 million on the Nasdaq. Advancers were ahead of decliners by 3.6-to-1 on the Big Board and 2.3-to-1 on the Nasdaq.

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Several of our readers have asked for a close-up of the current struggle. On the S&P 500’s chart, we clearly see the resistance line at 1,336, which, when translated to the other major indices, is Dow resistance at 12,610 and Nasdaq resistance at 2,885.

In order to reverse this picture of lower lows on the long-term charts, the S&P 500 must close above 1,336 and then the 50-day moving average at 1,353.

If that happens, the S&P 500 could make a quick run to about 1,405 — not impossible since the Relative Strength Index (RSI) has moved up to neutral. But it is unlikely since volume continues to favor the bears, as does breadth. And the indices of small-cap and midcap stocks confirm an identical bearish pattern.