Is This Just Another Dead-Cat Bounce?

�The euro zone has agreed to take a big leap forward in economic integration, but failed to deliver a convincing answer to investors worried about its ability to tackle threatening debt crises in Italy and Spain.� Reuters, Berlin, Dec 9.

The stock market rallied on Friday following an agreement from the euro zone to provide the International Monetary Fund (IMF) with up to E200 billion in loans. Britain, however, made it clear that it will not support the process, so whether the pact will hold together is questionable. Britain is the third largest economy in the EU, and without their cooperation concerns remain that the zone could fracture into the old country-by-country currency.

Italy�s 10-year bond rose to over 6.5% from 6% earlier in the week, which puts it close to the 7% level that economists have said is unsustainable. The euro made small progress on Friday climbing to $1.3363 from $1.3347 on Thursday. A Wall Street Journal editorial on Saturday began by saying, �The euro-zone crisis started in the bond markets — and despite the deal at the European summit, it still lives there.�

For the week, the Dow Jones Industrial Average rose 1.4%, the S&P 500 gained 0.9%, and the Nasdaq rose 0.8%.

On Friday, the Dow was up 1.55%, the S&P 500 gained 1.69%, and the Nasdaq was up 1.94%. Volume on the NYSE totaled 819 million shares, while the Nasdaq traded 440 million. Breadth was positive on both exchanges with advancers ahead of decliners by 6-to-1 on the Big Board and 4.5-to-1 on the Nasdaq.

Although Friday�s rally erased most of Thursday�s loss, volume lagged on both exchanges and was well below the quarter�s daily average. A lower-volume rebound after a plunge tells us that there are few committed long-term buyers in the crowd, and so the chances of another dead-cat bounce are high. In plain language the bounce was composed mostly of traders and low institutional participation — not the stuff of major bullish breakouts.�

And The New York Times headline of the day, �Leaders Agree on Fiscal Pact,� did little to shore up the euro, which rose fractionally. The U.S. dollar, as tracked by the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP), fell just 7 cents.

Immediate support is tracking an uptrend line at about $22.05, but more significant support is at the 50-day moving average at $21.91. Note that overall volume is declining, which favors the dollar�s bulls. But watch the price movement closely for a clue as to whether Friday�s rally �has legs.� And if you are looking for fast profits, check out my colleague John Jagerson who turned a 67% profit overnight last week.

Conclusion: The technical trend of the market is still a long-term bear market. The intermediate term is sideways, and the short-term trend is up. A failure to penetrate the 200-day moving average at 1,263 and the October high at 1,293 is serious in that three attempts have failed and each attempt was with lower volume. Initial support for the S&P 500 is at the 50-day moving average line at 1,220, but a Fibonacci retracement of 61.8% of the November low to December high renders a target of 1,200.

In this headline-driven market, focus on the movement of the U.S. dollar for a clue as to the stock market�s next move.