One Down Day Could Flip the Market

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.

The resiliency of the stock market continued yesterday as a rally that started midday proved to be relentless and pushed stocks to finish higher on the day. That now leaves �Santa Rally� hopefuls holding onto their mistletoe as major U.S. indices are on the verge of breaking near-term resistance areas.

The caveat, however, is that just one red day would take the edge away from the bulls and hand it over to the bears. That speaks to:

1. The narrowing of the trading range; and

2. The binary world we find ourselves in. �

On the sector front, technology led the way higher, while energy lagged and financials cozened up with the middle of the herd. Besides the complete lack of volume for the second straight day, the other thing sticking out was the lack of participation in the rally by the EUR/USD forex cross. From a risk-on perspective this sniffs of a bearish divergence, which may be something bulls can overcome if they can gather enough of a following to squeeze another couple hundred basis points out of the major global equity indices.�

A quick glance at the daily chart of the S&P 500 reveals several things. First, note that the index still trades within the 50-day and 200-day simple moving averages. Also note the resistance line connecting the tops of 2011 coming in just north of the 1,300 mark. And third, note the triangle/narrowing trading range. A break above 1,280 may lead to further upside while a break below 1,220 could lead us lower.�

Volume on the New York Stock Exchange the past two days has been meager and trending lower the past two weeks.

Much like the S&P 500, the semiconductor stocks as represented by the Semiconductor HOLDRs Trust (NYSE:SMH) still trades below the 200-day simple moving average and the downtrend line from 2011. It won�t take much to cause a breakout in this group of stocks, and from a momentum perspective the stochastics have plenty of room higher. However, just like the S&P 500, one solid red candle would negate the entire near-term breakout potential.�

For a little perspective, please have a look at the chart of the Nasdaq 100, which displays the index now bumping into the 2,400 area for the fourth time this year. The more a support/resistance level gets tested, the weaker it becomes. On the margin, that�s a bullish sign, but until a break to the upside of this resistance area, it�s also not worth acting upon.

Last but not least, lest we forget thatEuroperemains front and center as far as market-moving headlines are concerned, we would be wise to keep a close eye on their debt and equity markets. The German DAX Index is firmly wedged between its 2011 downtrend line and some horizontal support that also coincides with its 50-day simple moving average. Should that support level break, the 5,000 level will likely be targeted again.

It�s a binary tape for sure, and I for one remain doing as little as possible until better risk/reward setups peak through. Cash is king, unless it�s frozen or gone missing at/by a rogue broker or bank. And that itself is a sign of the times.