Stocks Bounce Back As Dollar Falls

Wednesday, October 20, 2010
Stock Market Commentary:

Stocks bounced back as the US dollar fell to consolidate Tuesday’s large move. Heretofore, volume patterns remain healthy as the major averages continue their 8-week rally. However, it is important to note that there have been an ominous number of distribution days that have emerged in the popular indexes which suggests caution. On average, market internals remain healthy evidenced by an upward sloping Advance/Decline line and the fact that new 52-week highs continue to easily outnumber new 52-week lows on both exchanges.

Q3 Earnings & QE2 Speculation Lift Stocks:

Stocks got a strong boost from the latest round of earnings and renewed speculation that the Federal Reserve will enter another round of quantitative easing (a.k.a. QE 2). Concurrently, the USD fell which helped a slew of dollar denominated assets rally; mainly stocks and commodities. At 2:00pm EST, the Fed’s Beige Book was released which was largely priced in to the market. The Beige Book is typically published two weeks before a Federal Open Market Committee (FOMC) meeting. Every time, a different Fed district bank compiles and publishes anecdotal evidence on how the economy looks from each of the 12 Federal Reserve districts. The book is used to give the Fed and investors a better gauge on how the economy is doing in each of the 12 districts around the country.

Market Action- Confirmed Rally Week 8:

Heretofore, the action since this rally was confirmed on the September 1, 2010 follow-through day (FTD) has been strong but the market appears to be placing an interim top here as the major averages consolidate their recent move. The S&P 500 sliced below its two month upward trendline (shown above) which is not a healthy sign. The next level of support for the major averages is their September highs, then their respective 200-day moving average (DMA) lines while the next level of resistance is their respective April highs. We have enjoyed large gains since the September 1st FTD and for the first time, the tape is getting sloppy.  Trade accordingly.

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