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Stock Market Rally Attempts To Resume

|Includes: DIA, QQQ, SPDR S&P 500 Trust ETF (SPY)

The S&P 500 index closed moderately higher today, approaching recent highs of the rally from October. A subsequent close well above 1,326 would reconfirm the uptrend and favor additional gains. However, the advance remains extremely overextended on a short-term basis and it will almost certainly be followed by a potentially violent overbought correction.



Additionally, the negative divergence between Treasury yields and stocks continues to signal caution. While the S&P 500 index is testing highs of the rally from October, the 10-year Treasury note yield is holding slightly above long-term lows. This divergence warns that the stock market is vulnerable to the development of an abrupt, severe correction.



With respect to cycle analysis, the move higher today nearly generated a cycle low signal, indicating that the Beta Low (NASDAQ:BL) may have formed yesterday. A move up to new short-term highs during the next few sessions would confirm that the beta phase rally is underway and favor additional short-term strength.



From a big picture perspective, the environment of elevated long-term volatility that was initiated by the stock market crash in 2008 continues to drive violent moves in both directions. Every advance and decline since May 2008 has been extreme in character and the latest rebound off of the low in October 2011 is no exception.



The strong move higher in January has changed the character of the long-term breakdown that occurred in August 2011 when the S&P 500 index closed below support at the lower boundary of the cyclical bull market from 2009. Price behavior during the next two months will provide an important signal with respect to long-term direction, so it will be important to monitor the stock market closely. We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.