The One Thing Missing From This Rally

To those focusing on technical analysis, yesterday afternoon�s 180-point rally following a weak morning made little sense. But the focus is on Europe, and rumors of new unnamed capital sources for an investment fund designed to buy sovereign bonds were enough to bring out the momentum players who drove the U.S. dollar down and stocks up.

After a morning of losses, the Dow Jones Industrial Average rallied to close up 0.71%, the S&P 500 rose 0.63%, and the Nasdaq gained 0.34%. But volume was lacking with just 782 million shares trading on the NYSE and 458 million shares on the Nasdaq. And with advancers leading decliners on the Big Board, and decliners ahead on the Nasdaq, the lack of leadership was obvious.

The S&P 500 is currently stuck in a trading range that is roughly defined by its 20-day moving average (green line) at 1,235 and the 200-day moving average at 1,273. A break under the green line should result in a test of the 50-day moving average at 1,197 (blue line), and a break above the red line will likely run into strong selling at around 1,300. In the middle of this jumble of lines is the former neckline at 1,260, which for the last three days has restrained an advance. (Find out how to play this with options.)

The lack of volume is an indication of a key missing ingredient that is required to move stocks higher — and that is commitment. And the momentum indicator supports this view with a downward sloping trendline that is now just a mere dot from going negative. High-volume breakouts are normally not preceded by mediocre momentum.

And two investments motivated by fear rose yesterday: Both the 10-year U.S. Treasury notes and 30-year bonds rose in price, while Italy�s bond prices fell and yields rose to over 6.4%.

Gold — the traditional hedge — continued its break from the 50-day moving average with a breakaway gap and a close at the high of the day. And crude oil headed higher for the fourth consecutive session with some floor traders and analysts suggesting that oil is becoming more of a �recessionary play, similar to gold, rather than a leading indicator of risk,� according to The Wall Street Journal.