Stocks Rally As EU Banks Get Recapitalized


Wednesday, October 12, 2011
Stock Market Commentary:

Stocks rallied on Wednesday as investors looked past a weaker-than-expected earnings report from Alcoa (AA) and a European plan was announced to recapitalize their banks. Wednesday marked day 7 of a new rally attempt which means the window remains open for a proper follow-through day (FTD) to emerge. All we need to see is a rally of at least +1.7% on heavier volume than the prior session to confirm a new rally. On a positive note, the major averages are in the process of tracing out a bullish double bottom (W) pattern (shown above). In early October, the S&P 500 briefly entered bear market territory defined by a decline of >20% from its recent high however the bulls quickly showed up and defended that level. Conversely, all the major U.S. averages are negative for the year and are flirting with bear market territory which is not ideal. Several key risk assets (multiple stock markets around the world, Copper, Crude Oil, etc.) officially entered bear market territory over the in recent months which bodes poorly for U.S. stocks and the global economy. Nearly every day since early-August, we told you that the major averages are trading between support and resistance of their 2-month base and until they break above resistance or below support expect this very sloppy trading range will continue. Put simply, after testing support (2011 lows), the market is now bouncing back towards resistance (September’s highs) of its wide-and-loose 2-month base.

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EU Banks Get Recapitalized, Fed Minutes, & Q3 Earnings Continue:

U.S. markets were influenced (again) by the latest news out of Europe. European Commission President Jose Manuel Barroso presented a plan to recapitalize E.U. banks. Elsewhere, Slovakian lawmakers met again to pass a bill to enhance the euro-zone’s bailout fund. Slovakia’s Parliament rejected the plan on Tuesday. In the U.S., the Fed released the minutes of its latest meeting which largely reiterated its recent stance (further action will be taken, if needed). Elsewhere, investors continued to digest the latest round of Q3 earnings.

We would be remiss not to note that in the past 7 sessions (since its October 4 near term low) the benchmark S&P 500 has surged a rather impressive +13%! That matches the 13% gain enjoyed during 2010! However, volume has declined during the past week and we are sitting near September’s highs (prior area of resistance) which is not ideal. Needless to say, it will be interesting to see how this plays out.

Market Outlook- In A Correction:

The major U.S. averages are still in a “correction” as they continue to bounce towards resistance of their 2-month base. The latest follow-through day (FTD) which began on August 23, 2011 has officially ended which means we will continue “counting” days before a new rally can be confirmed. In addition, it is important to note that the bulls scored a victory since many of the major averages closed above their downward sloping 50 DMA lines for the first time since late July! The next stop is September’s highs and then their 200 DMA lines. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. . If you are looking for specific help navigating this market, please contact us for more information.

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