Stock Market Handles Discount Rate Hike by Fed...

Stock-Markets / Stock Index Trading Feb 21, 2010 - 04:28 AM GMT

On Thursday evening, just after the market closed, the market took a shot to the jaw out of left field; although you can't argue it was hinted at, when fed Bernanke raised the discount rate to banks to 0.75% from 0.50%. The market, one would think, does not want to see lending made more difficult by making lending from bank to bank more difficult. Yes, it was only 0.25% worth of BP, but a start higher nonetheless at a time when the economy is trying so hard to heal some very deep wounds. Anything that hurts money flow must be considered a negative and once the new hit it hit fairly hard. The Dow futures almost immediately sank nearly 100 points. Not pretty with stocks taking a real shot after hours led my commodity and financial stocks.

Things looked bleak for today's trading. Overnight we saw the futures trading lower but a bit off the worst levels. A good CPI (Consumer Price Index) report came out an hour before the market opened and the futures recovered nearly all of the losses as the realization hit home that the small increase was likely a time deal and would not become an ongoing headache for the economy. We thus opened only slightly lower and stayed there until a bit more selling hit about 30 minutes later. About the most the bears could muster was roughly 50 Dow points. From that moment on it was a day of slow recovery as the indexes all went green. Nicely green at that but then some late day selling hit a bit to take things off their highs but still in the green. Considering the bad earnings from Dell Inc. (DELL) and First Solar (FSLR) on top of the Bernanke news, it was nothing short of spectacular that the bulls could pull this day out with no losses on the major indexes. A real victory for the bulls on a Friday, which makes it all the better.

The PowerShares DB US Dollar Index Bullish (UUP) or the dollar ETF tried to climb higher the past few days after printing a nasty black candle. A black candle after a long move up usually but not always signifies a move has run its course. It tried for new highs in the pattern yet again today but once again printed a very large nasty black candle with high oscillators and negative divergences. All of this on the daily chart. If you use the $USD chart instead, its no better. Same result. This once again suggests that the dollar is topping out here short-term and if that's the case, commodity and financial stocks should do well in the weeks to come. This chart of the UUP or $USD if you prefer, must be monitored very closely as we move along here. To my eye it tells me the market will want higher overall with the normal amount of pullbacks from short term overbought oscillators.

The 60-minute charts could still use some unwinding from overbought but it’s possible they could do most of their necessary unwinding my moving laterally. That has been the case thus far but you can't discount a bout of short term selling at any moment to get them more unwound and set up better for further upside. Just know it can take place at any moment but will set up some better buying opportunities when it does. It should be looked upon as a good thing when we sell and not a negative.

Most of the stocks have made their initial move off the bottom of their wedges. These plays set up when they were at the bottom with positive divergences across most of the important oscillators on the daily charts. The first move is over but now its time for them to set up handles in their bullish patterns that will allow for them to make yet another move higher. These lateral handles can be a bit annoying at times as things don't move along as rapidly as we'd like but don't let that dissuade you from buying and holding the best set ups until they do make the move. The patterns made healthy moves on their oscillators which confirmed the first thrust up. That's critical as it suggests the buying was institutional in nature. No lag on the MACD, etc. Once the handles are set, these plays can repeat their initial move higher. Patience as that sets up.

When markets are healthy we see the Nasdaq leading as the thirst for beta increases. It therefore makes sense that the Nasdaq will be the first take back those lost 20- and 50-day exponential moving averages. It was. Once that took place it was important to see the S&P 500 make the move. It had by only a few points heading in to today's action, but with the fed hike and bad earnings last night, today we were going to get a litmus test and see just what the bulls had in their arsenal. They passed the test with flying colors as the S&P 500 never did give back that 50-day exponential moving average. Solid action for sure. With all the major indexes back above critical resistance and with most leading stocks also back above strong resistance, the market is now on more stable ground with the onus now back on the bears to take those moves away. The way the market held up today has to be disappointing to the bears and a celebration for the bulls.

Bottom line here is that the market has found a way to get back to the bulls being in control. Nothing is easy here and further moves up, which I believe are coming, will be more difficult. However, I do think we are going to continue to trend higher in the weeks to come but I am not suggesting you go all in. Let it come to us but so far so very good for the bullish case. We are long and plan on buying weakness for now.

Peace

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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