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By Lawrence G. McMillan

After the nasty decline early last week, the stock market pulled itself together and rallied. The Standard & Poor’s 500 Index bounced off the general area surrounding 1,220, and thus the selling that had occurred on Oct. 31 and Nov. 1 — severe as it was — merely looked like a quick retest of the 1,220 breakout level (see chart below). As the market then rallied back towards the 200-day moving average, the technical indicators began to strengthen to the point where all were on intermediate-term buy signals entering today.

However, the bears are not quite down and out yet. Today, selling started when the Italian Bond market dropped (yields rose), and there was a cascade of selling through the world. Whether it was caused by margin calls on Italian debt, as some say, or merely by traders wanting to lighten up (the market wasn’t really very overbought, though), the counter-punch thrown by the bears has badly bloodied the bulls’ collective noses. Whether the bulls can once again step in here and rally the market is unclear.

When the market responds so violently to news items like this, nearly all means of technical and fundamental analysis go out the window. Rather, fear (or greed, at times, but not this time) takes over, and the selling just feeds on itself. As one frustrated analyst opined, “Will you just tell me when the news (out of Europe) matters and when it doesn’t?”

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