Looks like a jailbreak–but there's no need to call the police. The stock market finally broke out of the prison it had been in, i.e., a 10-week trading channel that saw multiple successful tests of support and resistance (for example, between SPY 112 and 122) and a few attempts at breakouts and breakdowns—each time failing to confirm the move with a follow-through. Well, this week we got the technical breakout, as I suggested last week we would. Materials, Financials, and Energy have led the charge.
As everyone knows, the wildcard continues to be Europe, as we have anxiously awaited a decision on a bailout package for the EU's ailing financial system. Late word on Wednesday night as I write this is that a deal has been reached.
Every hint of progress in the negotiations emboldens the market bulls. The G20 meets on November 3-4, so European leaders have been meeting yet again in Brussels to hammer out something in advance to shore up the contagion that has moved from Greece to Ireland to Portugal…and now Spain and Italy (a.k.a., PIIGS). For those of you scoring at home, the Greece 1-year bond is now yielding 190% and the 10-year yields 25%.
Word on the street is that French President Sarkozy will call Chinese leader Hu Jintao to discuss China possibly throwing in some cash for a fund that would further expand the $600 billion European Financial Stability Facility (EFSF). The EFSF spokesman is calling this simply "a normal round of discussion with important buyers of EFSF bonds." Okay, whatever you say.
The SPY closed Wednesday at 124.30. Friday gave bulls their low-awaiting breakout, and Monday provided strong confirmation. Some jitters about Europe on Tuesday and Wednesday caused the requisite pullback and a minor test of resistance-turned-support before pushing higher into the close. The 200-day simple moving average is just above at 128. RSI, MACD, and Slow Stochastic are all hanging in there okay. My main concern from a technical standpoint is the possibility that Wednesday's candlestick turns out to be a bearish "hanging man" formation. But overall, the breakout looks promising—it just needs support from our friends in Europe.
The VIX (CBOE Market Volatility Index – a.k.a. "fear gauge") closed Wednesday at 29.86, which is back below the important 30 mark. However, the TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) continues to remain elevated, as it closed Wednesday at 41.46, which is right around its 52-week high.