Look For An Afternoon Rally – The Bears Will Test The Bid First!

Yesterday, the market staged a nice rally after the Fed lowered interest rates by a half a point. Eisenhower was our president the last time the Fed funds rate was this low. Interest rates around the world have been cut by central banks and more action is expected. This week, China dropped its rate by a quarter-point. That was the third cut in six weeks. Japan is also considering a quarter-point rate cut. That is incredible considering their rate is at .5%. This would be the first interest-rate reduction for them in seven years. Overnight, they announced a $51 billion stimulus package that includes payouts to families, tax breaks on mortgages, a bank rescue scheme and relief for small businesses that have been impacted by the credit crunch. In Europe, Norway lowered its rates by .5% this week. Analysts widely expect the ECB and the Bank of England to lower rates by .5% when they meet next week. Inflation concerns were eased this week when Germany announced that prices declined more than expected. Germany is also considering a $39 billion stimulus plan. The credit markets continue to improve and central bank officials around the globe are not taking any chances. Our Fed extended lines of credit to emerging countries to help them overcome the credit crisis. Brazil was granted a $30 billion credit line and its market has rallied 20% in the last three days. Stocks looked strong yesterday, but they sold off hard right into the bell. Rumors circulated that GE was going to lower its profit guidance and traders hit the panic button. That story was discredited, but it shows how skittish the market is. Overseas markets have posted huge gains overnight. Asia was up 10% on average and Europe is up about 2%. When the market gaps higher, it attracts sellers. "Selling the rips" has been a successful tactic and we are currently seeing a pullback from the highs. The downside will get tested today, however, I believe we will find a bid to this market. Once we do, the shorts will cover and a feeding frenzy will set in. Watch for an afternoon bounce and rally. With every failed decline, the bulls gain confidence. Durable goods orders and the GDP came in better-than-expected. I don't see any news during the next week that could spoil this rally. If the SPY can get through 100, I believe it will run to 110. By next Thursday, I plan to take profits on my long positions. The Unemployment Report has spooked traders every month this year and it is a dark cloud on the horizon. If you have sold out-of-the-money puts as I've instructed, you are making great money. I still prefer this strategy since the market can't generate a decent head of steam. Continue to let time premium decay and the implied volatility collapsed to work in your favor. By next week, you should consider buying some of your short puts in.

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