Yesterday's action was a great start, but we need follow through....

As I wrote on Tuesday, I continue to reside in the camp believing it won't be different this time, that Congress won't let the country default on its debt. Yesterday offered an encouraging sign in this direction as the stock market shot up over 2% with word that key Republicans were meeting with the president. Advancers outnumbered decliners by more than a 5-1 ratio, up/down volume was even more impressive at greater than 10-1 and the TRIN finished at 0.45, one of its lowest numbers YTD -- all very bullish readings. What we need to see from here is follow through to the upside, and so far today we are seeing it.

An updated S&P 500 chart:

Source: Stockcharts.com

As it did in June and August, the S&P 500 held at about the 100-day moving average before spiking higher yesterday. Note also it held at the ascending trend line (orange line), insuring that the rising channel remains intact with the upper limit beyond 1720 (red line). On Tuesday, I pointed out the Index was oversold with the stochastic below 20, but that it was "prudent to wait for the stochastic to hook-up and rise beyond 20 to better confirm a buy signal." With yesterday's move, the stochastic has indeed reverted up through 20.

Also on Tuesday I highlighted the developing head-and-shoulders pattern in the weekly DJ Industrials chart, but wrote:

[A]s I always remind, it's important not to jump the gun and overly anticipate what may happen with a formation-in-progress. For a head-and-shoulders pattern to actually become bearish, the neckline must be penetrated to the downside -- something that has yet to occur (neckline at about 14750 level) and, importantly, may not occur at all.

An updated weekly chart of the DJ Industrials:



The neckline was never breached in a meaningful way, i.e. beyond just slightly below 14750. In fact, instead a candlestick hammer has formed (orange circle), which is typically a bottoming pattern. Also, note in the upper inset that the RSI has retreated but held at the 50 level, thus far remaining in the upper portion of the RSI range (bullish).

Yesterday was a great start to what could evolve into a sustained move off oversold levels. But obviously we'll need to see continued follow-through to build on yesterday's gains, and that will presumably require sensible follow-through by the folks in Washington -- something that has been in short supply of late. However, yesterday's crack in the political standoff was an overdue and gratifying indication to investors that sanity will likely win out (it won't be different this time).