Tight Trading Range Continues

Tuesday, October 12, 2010
Stock Market Commentary:

Stocks opened lower as the US dollar rallied and concern spread that China’s economic growth may begin to slow but the bulls showed up in the afternoon on renewed prospects of QE 2.  Volume was heavier than the prior session which signals that large institutions are not aggressively buying or selling stocks.  On average, market internals remain healthy evidenced by an upward sloping Advance/Decline line and the fact that new 52-week highs easily outnumber new 52-week lows on both exchanges.

Fed Minutes- QE 2 On The Horizon:

At 2pm EST, the Federal Reserve released the minutes of their September 21 meeting. As expected, the minutes echoed the Fed’s rhetoric and showed that policy makers are willing to step up and defend the US economy from entering a double dip recession, if needed. The USD fell and the major averages rallied after the minutes were released. The minutes also showed that policy makers are prepared to ease monetary policy “before long” and focused on purchases of Treasuries and boosting inflation expectations as ways to add stimulus.

Wall Street, dubbed this phenomenon QE 2 which stands for quantitative easing two. It is important to note that much of the 2009 rally was directly due to QE 1, so do not underestimate the gravity of QE 2. More recently, stocks rallied last week even after a dismal jobs report largely due to anticipation of QE 2.

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 September highs, then their respective 200-day moving average (DMA) lines while the next level of resistance is their respective April highs. Trade accordingly.

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