Ride the Bull

THE STOCK MARKET IS ON THE VERGE of a new breakout. While the technical evidence today is conflicted as ever, there is one thing the bulls have that the bears do not -- the market is going their way. It may not be the "next leg up" but it's better than the alternative.

After last week's sharp rally, the ensuing pause was rather mild. It certainly would have been reasonable to look for more than two small days of rest, but if we look into its technicals we'll see that the market gave back 25% of its rally with much lighter than average volume. This is a classic definition of a correction.

Unfortunately, this is all short-term analysis. What we want to know is whether this rally will continue, and for that we have a relatively simple chart to follow (see Chart 1). The Standard & Poor's 500 is now challenging 1490 once again, and if it can move significantly through that level it will have proved itself worthy of another run at its old highsThe 1490 level is what chart watchers call resistance -- the price level at which supply swells and advances stall. A successful crossing above that level means that the demand was able to soak up all that supply, and then some, and that clears the path toward even higher prices.

How high is high? Assuming the breakout actually occurs, the old highs between 1555 and 1565 would be likely targets -- and formidable barriers.Last week, I wrote, "Another consideration is that for the first time since the major bottom in August 2004, the S&P has not made clearly higher highs and higher lows."

What this means is that the forces that drove the market three steps forward and one step back in the natural ebb and flow of a bull market had changed. In 2007, it has been three steps forward and three steps back, and that is a different animal on Wall Street. Therefore, unless proved otherwise, 2007 is shaping up to be a giant trading range at best and the start of a significant decline at worst.

How do we know which one it is? We don't but we must give the benefit of the doubt to the side that is currently winning. The bulls now have the ball.

But as the market rallies, supporting evidence is still rather shaky. For starters, the volume on today's rally was not much different during the bulk of the rally in the morning hours than it was Tuesday as the market fell. In fact, volume during the entire post-Thanksgiving rally has been rather uninspiring.

A chart of the very active SPDR S&P 500 exchange-traded fund (ETF) shows a continuous decline in volume as price moved higher (see Chart 2). The same is true for all the other major broad market ETFs. What this means is that the rally is not drawing in new bulls, and that means its fuel is in danger of running out.