U.S. Equities Rebound to Post Strong Gains

Thu, Oct 21 2010, 02:16 GMT
by James Hyerczyk

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One day after U.S. stocks fell sharply amid mixed corporate earnings and as China raised interest rates for the first time since 2007, the major indices extended their broad-based rally Wednesday, buoyed by a positive outlook for the financial sector and a spattering of strong earnings reports from airline and commodity related companies.

Amid speculation that banks will be forced to buy back bad mortgages, Apple, Inc. earnings that missed analyst forecasts and after China’s central bank raised interest rates, the US 30 declined into the close on Tuesday, leading some investors to believe that more downside action was likely.

The major stock indices firmed overnight however, on the heels of the resumption of the U.S. Dollar sell-off, driving up demand for higher yielding assets. After forming a support base throughout the day, all three major futures indices mounted a strong rally into the close following the afternoon release of a less than stellar Fed Beige Book.

In its report, the Fed said that U.S. economic activity continued to rise modestly in September and early October. Growth picked up in several districts, but many areas showed continued signs of sluggishness. The reserved outlook for the economy seemed to be what investors wanted to hear because it fueled speculation that the Fed will boost purchases of government debt in an attempt to stimulate the economy.

With the Beige Book reiterating the call for quantitative easing, U.S. equities remain poised to move higher. Based on Wednesday’s positive reaction to the Fed report, investors are likely to continue to drive these markets higher on the growing perception that the economy is growing but not accelerating.

The firm trade at the close has put this market in a position to challenge the high for the week at 1182.25.

As we approach the end of the week, last week’s close at 1175.00 becomes most important. This week marks the eighth week of higher tops and higher bottoms, making this market vulnerable to a weekly closing price reversal top.

Traders should watch the action around 1175.00 to see if the E-mini S&P 500 is attracting selling pressure. Although a close under this price is what we are looking for to form the reversal top, this price may act as a pivot price over the next two days.

Published on  Thu, Oct 21 2010, 02:18 GMT

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