Stock Market Update - Exhaustion or Breakout?

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In the last update I had suggested that it was probable to see another push to new rally highs before an ideal topping pattern would complete for a possible extensive move down in stocks.

Obviously we have seen a move to new highs, but in dramatic fashion in conjunction with associated "news" from the fiscal cliff situation.

That move down into that recent swing low has been completely retraced in less time than the decline took to form keeping the price logic objectively up.  So the question is whether this recent pop higher is an exhaustion type move in typical "buy the rumor, sell the news" fashion, or whether it is a real breakout with likely continuation.

From a technical perspective, a very large gap up to a new multi month high seems rather likely to be filled over the next week or two from statistics I have seen.  And as seen in the hourly chart of SPY above the MACD is the most overbought it has been in months and is just starting to cross down into a sell signal.  However there is no divergence on it, suggesting that even if a pullback of some degree occurs soon, the market may need to under go a period of "slowing down" before it is ready to pull back toward that gap up.

There is nothing that clearly invalidates the possibility of the upward pattern completion that I suggested in the previous update.  However, there is no confirmation of any sort that a high is in place at this point.  So from perspective, any move BELOW the 12-31-12 low would be a sign of significant weakness for stocks.  If you think about it, if this pop higher truly shifted the market opinion and cleared the way for a move higher, then any price move back below that pre-news level, would suggest that the news did not really change much.  In other words it may have just been an exhaustion type blip.

The huge drop in volatility the last couple days may be offering an ideal time for purchasing put protection at this point.  I personally am watching the daily MACD and weekly MACD charts on the indexes for a possible shorting opportunity.

On a side note, the NASDAQ seems to still be positioned well to form a head and shoulders top pattern.  I will have more to offer on that after next weekend when I can see the CoT reports that cover large trader response to the recent news and extreme price movement.  If we see the "smart money" selling heavily on the news, then that would suggest a likely failed breakout attempt in stocks here, and a probable lower top in the Nasdaq which could form the right shoulder.

AAPL has been weak relative to the market, which may be a negative for stocks.  Earnings is coming up in a couple weeks, so that could also spark a big price move in AAPL and may give some solid indication for the future direction of stocks.