By Greg Peel

The Dow closed up 100 points or 1.0% while the S&P gained 1.1% to 1115 and the Nasdaq added 1.2%.

The last time the Dow put together three consecutive triple-digit gains was 20 months ago. At 10,525, the average has now regained positive territory for 2010. The more indicative S&P 500 closed at 1115.01, an insect's appendage short of the 1115.10 closing price of December 31.

But last night the S&P did regain its 200-day moving average, which it crossed at 1113. The index has passed its previous peak earlier in the month of 1096 to make a higher high. Among technical analysts, all talk of late has been of head-and-shoulders patterns. As the following chart shows, there are arguably two potential HAS patterns to contemplate.

The first is a smaller version, which is defined by a left shoulder at the peak early June of 1102, followed by the head in July at 1117, and a right shoulder at 1096 later in July. We have now passed that right shoulder, and if the S&P can close 2 points higher we have passed the head and can dismiss the pattern.

The second is a wider, larger version, which features a left shoulder in January of 1150, a head at the April peak of 1217 and a right shoulder in July of 1117. Or – if the S&P 500 fails to break up through 1150, this current run will be possibly forming a dangerous looking right shoulder. So all up, we'd like to pass 1117 and then we'd really like to pass 1150.

Or we could all just get a life. Unfortunately technical analysis often works because the market trades accordingly.

This has been a very sharp three-day rally, and once again it has featured light volume. Those two factors are usually more indicative of a temporary overbought situation than a strong bull pattern. For strength to be confirmed, holders of cash, US Treasuries and gold will need to be convinced enough to switch back into stocks and give the rally some guts. But there are at least two factors keeping money on the sidelines here – one technical and one fundamental. Heads and shoulders aside, the technical factor is indicated in the following graph:

It's that “black cross”, marked by the 50-day moving average having trended below the 200-day. Bear markets are proceeded by black crosses, however it does not have to follow that a black cross must mean a bear market. So, if this current little rally can actually be enough to turn around the 50-day trend, then maybe we might just find some wider support.

The second factor is fundamental – the US economy has clearly slowed. And there are still problems in Europe and China is still pressing on the brakes. The bears are convinced we must go lower before we can go higher – before anyone on the sidelines can be really convinced that “it's time”.

So thus we are at an interesting level. The swing factor in all of this, and one which has been influential this past week, is US earnings reports. We still have a way to go, but the most recent reports appear to be contradicting the dour economic data.

Last night it was the turn of freight company FedEx – another stock which is seen as an economic bellwether. For Wall Street, it was not the June quarter result that was important. It was the fact management raised its 2010 earnings guidance from $0.85-1.05 to $1.05-1.25 and its 2011 guidance from $4.40-5.00 to $4.60-5.20. FedEx shares jumped 5.6% and dragged all the market along.

Prior to the FedEx announcement, Wall Street had already jumped from the bell on the news new home sales shot up 23.6% to 330,000 in June when economists had expected 313,000. This seems like a huge move, but it has to be put into the context of the immediate post-stimulus fall in new home sales in May of 36.7%. Net out the two months and the numbers look more realistic, and still weak. But better than expected is still better than expected.

These were the two defining releases of last night's session. Tonight will see local companies US Steel (Dow) and Western Union amongst hundreds reporting along with foreigners Deutsche Bank and UBS, and also BP. We will also have the Case-Shiller house price index, the Richmond Fed manufacturing index, a consumer confidence measure and an auction of US$38bn of two-year Treasuries.

The two-year yield continues to hover around all-time lows of 0.6%, while last night the benchmark ten-year remained stuck smack on 3%.

Risk appetite saw the US dollar index fall to its lowest point since April last night, down 0.5% to 82.04. And the Aussie is back in the 90s, rising 0.75% to US$0.9022.

Gold slipped again, by US$7.10 to US$1182.10/oz, oil was flat at US$78.98/bbl, but base metals had a positive session, rising 1-2%.

The SPI Overnight was up 26 points or 0.6%.

It was not all excellent news on Wall Street however, and slipping under the radar last night were the Chicago Fed national activity index, which fell from 0.31 in May to -0.63 in June, and the Dallas Fed manufacturing index, which rose from minus 2 in June to plus 5 in July.

The Chicago number sets zero as “trend growth”. So while activity slowed, the three-month average of the index fell to only minus 0.05 – very close to trend and thus not too ominous. By contrast, the Dallas number sets zero as the point between expansion and contraction. So activity expanded in July, but only to a very low number.

Again, both these numbers point more to sluggishness than they do to double-dip.

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