Day 3 Of A New Rally Attempt; Stocks Rally

Tuesday, February 9, 2010
Market Commentary:

Stocks rallied, with emerging-market equities recovering from the worst three-day slide since the March ’09 lows, as the dollar pulled back to consolidate its recent move. A weaker dollar helped a slew of dollar denominated assets rally (mainly stocks and commodities) as the inverse relationship eased.

Greece May Not Default:

Overnight, the euro rallied on speculation that Greece will receive European aid to tackle its massive budget deficit. On February 11, EU leaders are scheduled to discuss Greece’s plans to reduce its massive budget deficit and many now believe that the EU will offer assistance. European Central Bank President, Jean-Claude Trichet, unexpectedly left a meeting in Sydney one day ahead of schedule and returned to Europe to discuss this issue. In related news, European Commission President  Jose Barroso supported the euro when he directly said that investors would be wrong to bet against it.

Market Action- In A Correction:

Looking at the market, Tuesday marked Day 3 of a new rally attempt which means that as long as last Friday’s lows are not breached this rally attempt remains intact.  The earliest a possible follow-through day (FTD) could emerge will be this Wednesday if the major averages rally at least +1.7% on higher volume than the prior session. However, if Friday’s lows are breached then the day count will be reset and a steeper correction may unfold.

It is also important to see how the major averages react to their respective 50-day moving average (DMA) lines which were support and are now acting as resistance. Until they all close above that important level the technical damage remaining on the charts is a concern. So far, the market’s reaction has been tepid at best to the latest round of economic and earnings data. Remember that the recent series of distribution days coupled with the deleterious action in the major averages suggests large institutions are aggressively selling stocks. Disciplined investors will now wait for a new follow-through day to be produced before resuming any buying efforts. Until then, patience is paramount.

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