The S&P 500 and Nasdaq Composite continued flirting with the break-even level for 2011 as investors continue focusing on the situation in Europe. 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.

Italy Gets A New Prime Minister & Germany Takes Steps Towards 2-Speed Europe:

Over the weekend, Italian PM Silvio Berlusconi stepped down amid pressure that he failed to address their ongoing debt woes. Analysts believe that Italy’s new leader Mario Monti (or Super Mario for short) is expected to form a government of technocrats, not politicians. The purpose is to help the country implement their austerity measures until elections can be held in 2013. However, stocks turned lower after German Chancellor Angela Merkel’s ruling Christian Democrats Union party passed a bill which would allow any country to leave the euro zone. This was the first tangible step towards a new two-speed Europe. The goal would be a region with and without the euro currency.

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!

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