The wild ride continued this week, culminating in a dramatic nearly 600 point swing following the Fed move to cut the rate 50 basis points at the little used discount rate window.  The fact that the Fed is now acknowledging the concerns, wiling to take action and leaving open the possiblility of a cut of the fed funds rate probably had more to do with the jubilee than the rate cut itself but the oversold market was looking for Fed action and it got it.  It proved to be enough of a springboard to catapult both the Dow and Nasdaq past key resistance to reclaim key support levels. 

So can we forget about the issues plaguing this market now?  NO! Let’s keep in mind that the only sector really moving last week was financials.  Have a look at the broad market across semis, transportation and even gold and what you see is big losses again. Once the euphoria of the Fed move on Friday wears off, I fully expect the market to focus once again on the daily dose of subprime related meltdowns.  Also, let’s not forget that the Fed did acknowledge that it is quite concerned about what the credit concerns could do to do the economy which might have been lost in all the euphoria Friday.

From a technical standpoint, the massive capitulation we saw on Thursday likely marks a bottom at least in the short term.  However, with the market carving out the largest correction in 4 years in just a few weeks, it will take time to repair this kind of technical damage.  We will need time to carve out a base, which means that we’ll probably need to test those lows at some point before having a chance to take out all time highs.    What this bounce does is create opportunity.  Opportunity for those of you who have remained fully invested to lighten the load a bit and for the more aggressive, shorter term trader to begin initiating some new short positions.  Remember that bull markets die hard and offer multiple chances to get out.  We can’t possibly know how far this market will correct, so continuing to play cautiously until more signs of a bottom are in place is the smart thing to do.  There are still some major concerns out there across the board and we have only begun to scratch the surface.  Keep on eye on how the market reacts to this news because near the bottom the market will begin shrugging off the concerns and focusing on the positive.  We’re not there yet.

Two big positives in the Dow last week – capitulation on Thursday and reclaiming of key support of the 200 day moving average on Friday.  However, I think that any further moves up create greater risk for holding long positions and increasing profit potential for shorts.  The pink lines outline resistance levels.  If the Dow can bust through 13200, I think there is a very good chance of testing this new downward trend line around 13400.  Look for decreasing buy volume on any rally attempts as an indication that the bounce is nearing an end.

Same thing for the Nasdaq – capitulation ultimately led to a reclaiming of key support above 2500 but big resistance areas loom.  If it can muster enough strength to get above Friday’s highs then we will probably see a test of the short term downward trend around 2550.

 Notice that the S&P nearly touched the March lows.  I think this area will prove to be a critical area of support that the S&P will ultimately retest before the correction is said and done.  It should be noted that unlike the Dow and Nasdaq, the S&P has NOT reclaimed key support levels.  It will be much more difficult for it to test its downward trendline around 1470.. it first needs to push through big resistance around 1455.

 ::: Model Portfolio Update :::

Yet another busy week for the portfolio as I closed out several long positions, captured some more gains on the short side and initiated a few more longs to capture some of the big bounce that began late Thursday.  I certainly haven’t been making large bets either way, but I have been fairly aggressive in the playing both sides of the market.  I was fortunate to sustain very little damage during the plunge in the first half of the week by closing small long positions quickly and then quickly locking in gains on the short side when it appeared the market was way overdue for a big bounce.  For the week, the portfolio took a minor hit, dropping 1.2% and remains well ahead of the S&P year to date performance with an 8.5% gain.  I’m not currently carrying any short positions, but will begin loading up again early this week especially if the market continues to rise with ligher volume like I think that it will.  The current allocation of the portfolio remains significantly in cash with 53%.