Stocks & Commodities Rally; US Dollar Plunges

Friday, October 8, 2010
Stock Market Commentary:

The major averages ended higher this week as the dollar fell and gold surged to another fresh record high. Volume patterns and market internals remain healthy as the major averages continue moving higher. The story this week continued to be the falling dollar. Gold surged to a new record high of 1366, the Dow Jones Industrial Average topped the psychologically important 11,000 level while oil jumped to a new multi-month high.

Monday & Tuesday’s Action: S&P 500 Breaks out Above 1150!

Stocks closed lower on Monday as the US dollar rallied and US capital goods orders and pending home sales were released. Both reports edged higher but earnings forecasts were lowered on many large cap companies. Pending home sales rose for a second straight month which suggests the housing market may be stabilizing after a lousy second quarter.

Stocks soared on Tuesday, helping the benchmark S&P 500 index jump above its recent near term resistance level of 1150 as the dollar plunged. The catalysts for the large move occurred after the Bank of Japan cut rates to zero, announced another round of asset purchases, and Australia’s central bank held rates steady. Stocks extended their rally after the ISM’s service index rebounded and topped estimates. The faster-than-expected report bodes well for the global recovery.

Wednesday- Friday’s Action: Stocks Consolidate Tuesday Large Rally

On Wednesday, stocks ended mixed after ADP, the country’s largest private payrolls company, said employers cut jobs in September for the first time since the January. The report showed that employers slashed -39,000 jobs, after a revised +10,000 increase in August. The report fell short of the Street’s estimate for a gain of 20,000.

Stocks ended mixed to slightly lower on Thursday after the European Central Bank and the Bank of England kept interest rates steady, near record lows for the 17th consecutive month which matched expectations. In the US, the Labor Department said weekly jobless claims slid by -11,000 to 445,000. Elsewhere, same store chain sales rose which helped allay slowing economic woes. On Friday, the Labor Department said US employers fired -95,000 employees in September while the overall unemployment rate held steady at 9.6%.

Market Action- Confirmed Rally:

So far, the action since this rally was confirmed on the September 1, 2010 follow-through day (FTD) has been very strong and stocks are simply pausing to consolidate their recent gains. It was encouraging to see the bulls show up and defend support (formerly resistance) in recent weeks. The next level of support for the major averages is their respective 200-day moving average (DMA) lines while the next level of resistance is their respective April highs. Trade accordingly.