US STOCKS-Wall Street extends year-end rally as mergers help

* Outlook from Adobe Systems tops Wall Street expectations

* Alpha Natural Resources bids for Massey Energy-report

* DSM to buy Martek Biosciences for $1.1 billion

* Dow up 0.27 pct, S&P up 0.35 pct, Nasdaq up 0.37 pct

* For up-to-the-minute market news see [STXNEWS/US] (Updates to open)

By Edward Krudy

NEW YORK, Dec 21 (Reuters) - U.S. stocks rose on Tuesday as earnings and mergers supported a steady upward trend in the equity market that investors say has further to run.

U.S. stock indexes continue to make new highs after taking out key technical resistance levels. The S&P 500 has rallied nearly 6 percent this month to two-year highs and is up around 21 percent from its lows this year.

Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco, said fund managers are reallocating money to equities from fixed income investments and reducing cash positions in anticipation of fresh money coming into equities next month.

"You get to this point toward the end of the year and performance and positioning are very key to fund managers," he said. "Over the last month you saw an asset allocation shift."

Adobe Systems Inc surged 6.5 percent to $31.73 after it forecast earnings sharply above Wall Street's projections, contrasting with a pessimistic outlook three months ago.

Alpha Natural Resources Inc made an offer for rival U.S. coal miner Massey Energy Co , the Wall Street Journal reported, citing members of Massey Energy's board. Massey shares rose 1.5 percent to $52.58 and Alpha Natural climbed 1.4 percent to $54.34.

The Dow Jones industrial average <.DJI> gained 31.53 points, or 0.27 percent, to 11,509.66. The Standard & Poor's 500 <.SPX> rose 4.31 points, or 0.35 percent, to 1,251.39. The Nasdaq Composite <.IXIC> added 9.69 points, or 0.37 percent, to 2,659.25.

NEXT STOP: HIGHER

The S&P 500 has gained for the last 3 weeks. The index broke through the 61.8 percent Fibonacci retracement of the 2007-2009 bear market slide earlier this month. Technicians say the next stop is the 76.4 percent retracement at 1,362.

John Brady, senior vice president at MF Global in Chicago, said he expects the market to move either slowly sideways or higher as S&P 500 works off an overbought condition shown in the seven-day and nine-day Relative Strength Index (RSI).

"It's a grind trade higher on not a whole lot of volume," he said. "A trade between 1,250 and 1,230 (in the S&P 500) seems really well contained, and any profit taking will probably be modest."

The RSI provides a measure of higher closes to lower closes over a given trading period and is closely watched by traders.

Dutch group DSM , the world's largest vitamins maker, is buying U.S. baby food ingredients maker Martek Biosciences Corp for $1.1 billion, sending its shares up 37 percent to $32.05 [ID:nLDE6BK04U]

Jabil Circuit Inc , an electronics manufacturing services provider, gained 7.3 percent to $18.95 after its first-quarter results topped analyst estimates, helped by growth across segments, and forecast a robust second quarter. [ID:nSGE6BJ0CV]

(Editing by Padraic Cassidy)