The market is currently caught in a battle for direction after continuous rejection of positive earnings and economic news for the past two and a half weeks. Rally volume continues to be dwarfed by selling pressure on down days.

So far, the past two days feel like a continuation of what was setting up to be an oversold relief rally, which actually set up on Tuesday and seemingly would have continued through yesterday, had it not been for the continued “sell the news” reaction.

Whether this action is predicated on discounting the economic stimulus tapering off over the next three months or the start of something more ominous is still too early to tell. We have to deal with the short term before seeing it turn into something longer term. One step at a time!

Reaction rally resistance levels come into play at 1066 and then 1075. Long-term downtrend line comes into play at 1088.

Also, keep an eye on the potential Head and Shoulders forming on the daily S&P with the right shoulder resistance at the aforementioned 1075 level. Other indexes with Head and Shoulder, or critical resistance, levels include RUT at 588, NDX at about 1733, DJT at 3820 (skewed because of Burlington Northern (BNI) on Tuesday), SOX at 308, CYC at 765, XBD at 115, and OSX at 198, just to name a few. See these few basic charts for visual representation:

S&P

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EURUSD

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RUT

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NDX

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The difference between the potential Head and Shoulders setup we have now and the rejection of what we saw in July is that the setup came in the last month of the second quarter and the subsequent rejection of the pattern came when earnings were being announced. This time it’s potentially setting up after most earnings have been released. That being said, there’s no need to anticipate it until we see failures at or around the respective levels.

Several of today’s monthly same-store sales came in noticeably weak (compared to estimates), including a few key players such as J. C. Penney (JCP), Kohl’s (KSS), Aeropostale (ARO), and American Eagle (AEO).

Cisco (CSCO) is up 2% after reporting a pretty good quarter, but with difficult visibility beyond next quarter. The phrase “already priced-in with uncertainty in forecasting” keeps coming to mind. There have definitely been a few standouts, but the overall reaction to earnings this month seems to dovetail with that thought.

All eyes are on the non-farm number tomorrow. Remember that much like the GDP number (that got us to S&P 1066 last Thursday, only to fail miserably on Friday for many reasons including GDP reality and the magnitude of the oversold bounce happening in just one day), those two particular numbers are backward looking. Unemployment lags even more demonstrably for obvious reasons.

Note that we saw some interesting divergence yesterday and today among correlation relationships in equity, FX, and bonds. Equity and the USD traded in sync (up and down yesterday afternoon) while credit traded down (yields higher). Today we have equity meaningfully higher but bonds barely budging and USD is virtually flat.

EURUSD has so far failed to break and close below 146.50, so the uptrend is still in tact there for now.

The DXY index is testing its important 75.80 level yet again.

If the market indexes mentioned above can get above their potential right shoulder levels and if currency and credit (yields and spreads) behave, then additional upside objectives will come back into play. Bond yields are the wild card more than anything there.

I’ll have more on the dichotomy between credit liquidity and credit availability in the coming days.