Stocks pause for another test of the rally

11/12/2009 3:32 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

That was fast.

Less than two weeks ago investors were worried that stocks would break through support levels and head for new lows.

Didn’t happen.

On October 30 the Standard & Poor’s 500 stock index hit 1036. That turned out to be the low in a dip that took the index down 6% from its high. And above the previous October 2 low at 1025.

The stock market rallied from that October 30 low to hit 1093 on November 10. That’s within striking distance of the October 19 high at 1098. And that advance has set off speculation that the rally is headed for 1150 or 1300 or 1500 on the S&P 500.

At this point, though, that’s all speculation. So far we’re stuck in a narrow trading range between the October low at 1025 and the October high at 1098.

And now we can either break above 1098 and watch stocks head for a new recovery high that will mark another in a series of the higher highs that has characterized the rally that began in March.   

Or stocks can retreat from the 1098 ceiling and head back down to test the October low at 1025. That test would then set the stage either for 1) a renewed rally if the test is successful, 2) another move to the top of the trading range if successful, or 3) for a move below 1025, if unsuccessful, that would signal a break in this rally.

Just as it was premature to assume this rally had come to an end at the end of October, I think it’s now premature to declare that stocks are destined to break out of their October range.

I think the odds favor a continuation of this rally because global cash flows from the dollar carry trade are likely to push the prices of commodities commodity stocks, and emerging economy stock markets higher.

This is the kind of choppy action that we should expect as stocks consolidate this rally and get set to move higher.

But until we see a close above 1100 or so, I think the market will remain too uncertain to call.

A few days are likely to give us enough information to settle the question.

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