The Thanksgiving week rally could continue, but it might be quickly derailed once Congress returns to work next week.
The Dow soared 207 points Monday, to 12,795 in a rally that was fueled in part by hope the "fiscal cliff" negotiations would go well. The S&P 500 jumped 27 to 1386, rising several points above its 200-day moving average, a positive sign.
Dennis Gartman, author of the Gartman Letter, said the market looked technically positive going into Monday, and that changed his negative view of stocks.
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"The fact that you had what technicians call outside reversals – new lows and a stronger close, a close above the previous day's highs in the Dow, in the Nasdaq, in the S&P and in the Russell. Those sorts of things can't be hoved off and not paid attention to," he said on "Fast Money."
"This probably has some distance to carry. We have to remember we came down almost 1100 Dow points. We came down almost 100 S&P points. You could get a 500 Dow point rally. You could get a 50 point S&P rally very easily," he said. "So yeah, I think there's still more carry through on the upside."
Barry Knapp, head of U.S. equities portfolio strategy at Barclay's, said Monday's rally could continue due to seasonal factors. "There's favorable seasonality in this week," he said. "You get all this hype going into Black Friday. It turns out to be unfounded and things slide back after that. I don't think there's any reason for optimism on the fiscal situation."
With Congress adjourned, markets keyed off the idea that there could be compromise on the fiscal cliff discussions. "This reminds me of August of 2011 when the best thing that happened after the debt ceiling fiasco was Congress going on recess. Just maybe for a couple of days, people forget just how far apart the two sides are," he said.
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Knapp said earnings and other factors are stacking up against the stock market. "The capital spending environment looks really weak and really weak going into next year as well. It's only going to get worse as fiscal talks go on," he said. "We had a little short covering seasonality rally today, but I certainly wouldn't be chasing it."
One of the main events Tuesday is Fed Chairman en Bernanke's speech at the Economics Club of New York at 12:15 p.m. Traders will be watching for any comments on the Fed's Operation Twist program and its discussions about changing how it communicates about interest rates.
In Operation Twist, the Fed buys longer duration Treasurys and sells an equal amount of shorter term notes. That program expires in December, and there is speculation the Fed will continue making asset purchases, by expanding the size of its $40 billion a month quantitative easing program.
Art Cashin, director of floor operations at UBS, said Bernanke's comments will likely be one of the more interesting events of the day. "He could be, if only because Congress is out of session. The president won't be back. We have this vacuum going on that allowed for this rally today. I'm sure he will be careful and try not to say anything to upset them," Cashin said.
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Focus will also be on the euro zone finance ministers, who discuss Greece's bailout and budget reforms. The euro gave up gains after Moody's stripped France of its AAA rating with a one notch cut late Monday. The downgrade follows a similar cut by Standard and Poor's in January.
Crude oil traded lower after the downgrade, but remains supported by the hostilities between Israel and Hamas. Oil rose nearly three percent during the regular session Monday, as Hamas continued to fire rockets at Israel and Israel bombarded Hamas targets in the Gaza strip.
Ward McCarthy, chief financial economist at Jefferies, said the markets will remain hypersensitive to fiscal cliff headlines. The fiscal cliff is the $500 billion expiration of tax breaks and the automatic spending cuts that would deliver a double whammy to the economy if Congress does not take action before the end of the year.
"The two issues are the fiscal cliff on which the clock is ticking loudly on, and the second is longer term budget negotiations that would preclude another downgrade in the middle of the year," McCarthy said.
McCarthy said that is too much for Congress to handle in the short period of time before year end. "I've been very negative with their ability to deal with the fiscal cliff. They have their eye on the wrong ball. When I might become more optimistic is when they say we can't get the longer term budget deal done in 2012 and they just get the budget extensions done," he said.
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McCarthy said he thinks there's room to compromise on tax rates, by moving the top rate to 37.5 and making the income threshold higher than the $250,000 discussed by Democrats. Democrats want to revert to the higher tax rate of 39.6 percent that was reduced in the Bush-era.
Besides Bernanke, there is housing starts data for October at 8:30 a.m. ET. Hewlett-Packard reports earnings before the opening bell, as does Best Buy, Campbell Soup, Medtronic, DSW, Hormel and Chico's FAS .
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