The S&P 500 and Nasdaq Composite are back in positive territory for the year as the situation in Europe eased and economic data in the U.S. topped estimates. As you know by now, from our point of view, the current EU bailout plan- to use leverage & add more debt to a debt crisis- is foolish at best and does not address the broader issues (i.e. the other PIIGS countries are broke). Finally, others are starting to take notice of this important question. Our job is to trade on what we see happening, not on what we think will happen. We do this by gathering the facts, interpret how the markets react to the news and trade accordingly, not stand in the way of them.  Stocks confirmed their latest rally attempt on Tuesday (10.18.11) day 12 of their rally attempt when the SPX and NYSE composite scored proper follow-through days (FTD).  It is important to note that every major rally in history began with a FTD but not every FTD leads to a new rally and the current rally is under pressure. That said, one can err on the bullish side as long as the major averages remain above their 50 DMA lines.
Monday-Wednesday’s Action:
Stocks rallied on Monday after the Greek PM thought he secured his job by forming a new coalition government to tackle their onerous debt woes. Meanwhile, the international focus shifted from Greece to Italy which is the next European domino that might fall. Reports surfaced that Italian Prime Minister Silvio Berlusconi was about to resign but Berlusconi quickly denied the rumors. Elsewhere, Euro zone finance ministers met in Brussels on Monday for a regular scheduled meeting, but spent most of the time discussing the ongoing turmoil in the region. On Tuesday, stocks traded between positive and negative territory as investors focused on Italy. Stocks slid after Italian Prime Minister Silvio Berlusconi lost his majority after a key vote in the lower house of the Italian parliament. However, a few hours later, stocks turned positive on the notion that Berlusconi will resign after the austerity budget is passed.
Risk assets were smacked on Wednesday after Italian bond yields surged! The underlying concern is contagion, meaning other EU countries may default on their debt. What “caused” the virtual panic was when Italian borrowing costs surged to +7% which was the level that previously forced other euro-zone nations (i.e. Greece, Ireland, & Portugal) out of normal credit markets and led them to seek bailouts from external sources such as the EU and IMF. In other news, Filippos Petsalnikos, speaker of Greece’s Parliament will serve as an interim replacement for outgoing Prime Minister George Papandreou.
Thursday & Friday’s Action: Italian Bond Yields Drop & U.S. Economic Data Does Not Disappoint
Stocks rallied on Thursday after the yield on Italian debt fell below the critical 7% level and economic data in the U.S. did not disappoint. The Labor Department said jobless claims fell 10,000 to a seasonally adjusted 390,000 last week. Not only did the number of jobless claims fall (which bodes well for the the monthly payrolls report and the broader economy) but it also fell below the closely watched 400,000 mark and was the lowest reading since the first week of April! Elsewhere, the Commerce Department said the U.S. trade deficit unexpectedly fell to $43.1 billion in September to its narrowest level since December. This topped the Street’s estimate of $46 billion. Stocks rallied on Friday after Italy passed a key austerity package and the situation in Europe backed off from the brink of collapse. Technically, the benchmark S&P 500 found support above 1230 and 1250 which was encouraging but failed for the third straight week to close above its 200 DMA line which still serves as formidable resistance.

Market Outlook- Rally Under Pressure:

The current rally is under pressure due to the recent sell off which sent the SPX below 1230 and erased half of October’s gains. This means that caution is king until the bulls regain control of this market. In addition, it is important to note that the bulls failed to send the major averages above their respective 200 DMA lines and the neckline of their ominous head-and-shoulders top pattern (1250) in late October. Therefore, we have to expect this sloppy wide and loose action to continue until the market closes above its longer term 200 DMA line. 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, feel free to contact us for more information. That’s what we are here for!