Sharp Bear Market Rally

The market flirted with support levels in early trading last Monday. When the selling pressure could not drive the market lower buyers came in. The market was up every day last week. The S&P 500 was up 5.3% at the close of trading last week and rose 7.3% from weekly low to high. Both the S&P 500 and the NASDAQ composite tested their 50 day moving averages last week. 

The five day advance last week was the markets’ best winning streak in roughly two and an half months. The market looked to be running out of steam at the end of the week. New lows topped new highs on the NASDAQ Friday.

The market was bolstered by a meeting of European Finance ministers last Friday. This meeting in Poland gave the bulls hope that a solution to European woes was in the works. The early rally was supported by better than expected numbers from the Michigan confidence reading. 

What lies ahead for this week? The FOMC meeting looms large. Will there be another round of QE? Many are looking for an “Operation Twist” type of announcement. This simply means the Fed will sell shorter maturity securities and buy longer maturity securities. By adding buying pressure to 10-year Treasuries they can effectively keep interest rates lower for an extended period of time. This is the method most feel will be used to stimulate the economy and markets. The expected size of this program would be similar to QEII, which purchased $600 billion worth of Treasury securities. 

US Treasury Secretary Tim Geithner attended Friday’s Eurogroup meetings. Some articles have suggested the Mr. Geithner has supported the tactic of increasing the size of the EFSF. These rumored plans supported the market as the Europeans seemed closer to developing a plan similar to the TALF program in the U. S.

In my piece last week I said that if sellers could not drive markets through short term support levels early in the week then a rally would ensue. The S&P 500 flirted with 1140 support last Monday morning. When markets failed to break last Monday a sharp rally ensued. I felt any rally last week would fail to exceed the prior week’s high. The strength of the move last week surprised to the upside. We haven’t been able to say that for a while. The NASDAQ composite actually exceeded intermediate resistance at 2613. The S&P 500 and Dow were not able to break through their respective intermediate resistance levels, 1232 and 11720. So, we will flip things this week. If these intermediate term levels of resistance cannot be taken out in the next few sessions, the odds favor a near term top is in place. Here are the levels of support for the market to focus on this week, S&P 500 1200, Dow 11,400, NASDAQ 2600. If these levels give way then a round of selling will take place. 

To measure the extent of any selloff, focus on these intermediate term levels of support for the respective indexes 1135/10,820/2437. Based on the strength of last week’s rally the odds have improved that these levels will not give way. 

Of course the market will continue to be driven by macro factors this week. News coming from the FOMC meeting and any comments from Europe will move the markets often this week.