Politicians Actually Did a Good Job
The market slowly moved higher yesterday. Volume was once again light and technology was a notable underachiever. But financial stocks did very well; the index that tracks financial stocks was up 1.7% on the session yesterday. And our benchmark the SPX continued to battle for 1250, but more importantly, it also found support at 1220.
The SPX had an extremely difficult time taking out 1220 resistance. Not only did SPX struggle to take out 1220 resistance in October, but it tried in August and September too.
But yesterday it was officially able to call 1220 support, which sets the stage for another retest of 1250 and a likely breakout.
And the bulls will have help today. Europe finally has numbers. The Euro leaders agreed to expand the bailout fund to $1.4 trillion. Yes, that's trillion, with a "t."
Over the past two weeks, since October 4, the market has risen on hope that Europe would be rescued by policy makers of the EU. And for weeks, politicians gave us broad answers to specific questions. But the market continued to blast higher as rumors (some reached $3 trillion) about a bailout were rampant.
In addition to the bailout, which should be big enough for this year, the EU also addressed the debt of Greece. The leaders of EU persuaded bond investors of Greece to take a 50% reduction.
The loss taken on that debt will pave the way for growth and more importantly it helped avoid a bankruptcy.
The market should like the bailout news; at least in the short term. The euro should also like the debt reduction too. And a rebound in the euro corresponds to a fall in the dollar, which helps equities and commodities.
In fact, the indices might like the news from Europe enough that each index will gap up. Normally, gaps are very good indicators of trend. But I am hesitant to follow gaps that occur after a huge rally near resistance. Gaps that occur near the end of a rally are usually called exhaustion gaps. And exhaustion gaps very frequently lead to a big, sharp, reversal.
Still, since I operate under the belief, until proven wrong (which a move below 1175 would in fact do) I trade with the assumption that the lows of this year are already in. In conjunction with that assessment, it's likely that any gap higher today will be a continuation gap, not an exhaustion gap. And that means we need to gradually expand our current long exposure in areas like technology and commodities which we have done throughout the entire month.
