Stocks soared yesterday following an agreement by European Union leaders to
increase their bailout fund to $1.4 trillion dollars, recapitalize their banks,
and agree to a voluntary 50% hair-cut on Greek sovereign bonds. And the euro
jumped 2.3% to $1.419, its best performance of the year. The S&P 500 rose 3.43%,
Nasdaq was up 3.32%, and the DJIA rose 2.86% backed by an increase in volume.
The NYSE traded 1.4 billion shares and Nasdaq crossed 736 million shares—both
significantly higher than the average daily volume of the last two weeks which
was under 1 billion shares. Advancers exceeded decliners by 7-to-1 on the Big
Board and 5-to-1 on Nasdaq. Click to Enlarge To put it mildly—Nasdaq had a
technical breakout. But the close above its 200-day moving average does not
establish a new bull market. However it does reinforce the bullish point of view
by confirming that the near- and intermediate-term trends are now up. This
should not shock us, as noted earlier this month, high-velocity rallies like
this are common in bear markets. In fact bear-market rallies traditionally move
faster and farther than bull-market rallies because bull markets plod without
the accompanying volatility. The current rally is one of the fastest on record:
The WSJ said that if yesterday was the last day of October, Nasdaq would have
had its best month in points up since January 2001. They failed to note that the
rally in January 2001 was a bear-market rally. It closed the month at
2,261—the bottom was not made until October 2002 at 1,108. Click to Enlarge
Despite some good economic news in the U.S., the focus of the rally was the deal
in Europe. And it had a profound impact on the dollar—driving it to within .32
of its 2011 low. But note that the stochastic issued a buy signal, which is
coincident with a gap that opened from 21.42 to 21.25. Gaps of this nature have
a very high percentage close rate. In other words look for a rally in the buck
soon. This week's break from the resistance zone of 1,220 to 1,230 had a
direct impact on the 500's Relative Strength Index, bumping it to 65.12 from
58.80 in just one day. Click to Enlarge At prior tops this year the RSI hit
67.35 and 67.00. We could be just a day or two from hitting those numbers again.
Conclusion: Yesterday I took the unusual step of entering the following on the
DTA comments section , "The probability of a 'Buying Climax' is very high.
Fib 66.6% retracement of March high to Oct low takes us just above the 200-day
moving average of the 500 at 1,275 and would be the flip side of the selling
climax in early October." This message pertains to short-term trades only. We
obviously did not get a reversal yesterday. But I want to alert our readers to
the fact that conditions now exist that could, at anytime, result in a reversal
down. And a reversal from the current high levels could have almost as much
impact as the reversal up that occurred just 3 ½ weeks ago. Short sellers can
either wait for the reversal or probe the market several times while being
protected with stop-loss orders. But others may want to wait for a definite
signal before shorting. Finally, as we enter the last couple of days of October,
there is a possibility that institutional buyers could commit cash reserves in
an attempt to "not be left behind." The stock market is in a high state of
risk for both buyers and sellers. If you are uncomfortable taking new positions
then sit it out until your comfort level returns. Get Sam Collins trade of the
day: This oversold fracking energy stock has breakout potential Get Serge
Bergers take on the markets: Only a fool would chase this bear market rally .
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