The chart below for the KBW banking index (^BKX) reveals the clue to yesterday's dramatic reversal and more than six hundred point intraday traversal on the DJIA. Exactly as was seen in mid-August (which I have marked in yellow on the chart) the combination of substantial short covering in the sector and genuine buying as opportunistic fund managers look to get behind the strong bounce potential, produced the powerful upward dynamics that kicked in during the latter part of yesterday's trading.

The banks have now rallied back towards the twin hurdles of the 50-day EMA and the downward sloping trendline through the highs extending back to last October. As the index confronts the 90 level it will become more apparent just how much traders believe that the Fed is now not only committed to aiding the financial sector, but also that the banking sector can seize the advantage of lower borrowing costs to help itself out of the mess that it is in.

If the downward trendline can be decisively broken, it may well be that the market will focus less on bad numbers from the likes of Apple and Motorola and breathe a collective sigh of relief that there is light at the end of the tunnel for the banks, homebuilders and insurance companies that have been clobbered for so long. The delicious irony of course is that it was precisely the availability of cheap money from the Fed that caused the accident prone bankers to mis-price risk in the first place, and yet once again we appear to be "solving" the problem with another spell of cheaper money for the banks.



The S&P 500 (^SPC) broke below Tuesday's low intraday yesterday but then began the almost vertical ascent into the close. There could be sufficient short covering momentum to bring the index back towards the 1380 level in short order. The next big hurdle will be the countdown to next week's FOMC meeting as traders wait to see whether Chairman Bernanke will pull another rabbit out of the hat. Ironically the more upward progress that is made before the meeting may reduce the FOMC's anxiety level and lead them to be less generous next week.



Early yesterday the Treasury market witnessed panic buying as European markets were selling off and US futures were plunging. The yield on the ten-year note opened yesterday near to 3.25% but as equities rebounded and asset allocators began to switch away from safety the yields moved up sharply. I would not be surprised to see a move back towards the 3.75% level as traders suspect that the recent panic about financial Armageddon may have been just a bit overdone.



One needs to be careful on the long side at the moment but the current dynamics suggest that this bounce could have some way to go. Large bets were being placed on Office Depot (ODP) yesterday and the stock moved up more than 13% towards a noticeable chart hurdle. If stocks like ODP can get above these downward trendlines then sentiment could shift enough for a prolonged counter-trend rally.



Analog Devices (ADI) looks to be tradable on the long side back towards the 50 day EMA.



Asyst Technologies (ASYT) faces a clear barrier at the downward trendline which tracks the 20-day EMA (blue line on the chart) but there are positive momentum divergences and a spike up towards $3.50 is a possibility.



Urban Outfitters (URBN) could see a further move up towards $28.


Clive Corcoran is the publisher of TradeWithForm.com, which provides daily analysis and commentary on the US stock market. He specializes in market neutral investing and and is currently working on a book about the benefits of trading with long/short strategies, which is scheduled for publication later this year.

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