The U.S. stock market rallied on an anticipated settlement of Greece’s debt problems on Tuesday. European stocks rose, as well, as word spread that private sector banks in France and Germany apparently have agreed “in principle” to roll over about $10 billion euros in Greek government debt.
It is hoped that this will encourage Greek lawmakers to vote in favor of a new austerity plan. But even though the Dow rallied in triple digits for the second day, volume was no better than on Monday as just 803 million shares traded on the NYSE. However breadth was better with advancers over decliners by almost 4-to-1 on the NYSE and 3-to-1 on Nasdaq.
But heady optimism with low volume is no substitute for a sound technical situation – and the problems facing the market are identical to those that it confronted following its failed rally in mid-June at 1,294. Yesterday the S&P 500 had its fourth test of the same resistance line and exceeded it by 2 points. A close at just 2 points above the line on light volume may be encouraging but is not final. In addition to the need to surmount the resistance at 1,294, the “500” must also break through the even more significant bearish resistance zone with the top at the intermediate resistance line and the 50-day moving average, both at about 1,317.
Institutions are prone to put money to work toward the end of the month as “window dressing” and in anticipation of a normal flow of funds early the following month. I’ve drawn vertical lines on the Dow’s chart and arrows to illustrate this point. In four of the last five months the market has rallied in the final week of the month. In each case the volume on these quick rallies was less than average. Are we seeing more of the same deceptive pattern? There are no coincidences in the stock market, and so unless buyers show a great deal more commitment than the puny volume suggests, we should remain skeptical of month-end rallies.
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