A Look at the Short Term

If you like excitement in the market, you have certainly had your share over the last several days. Yesterday, the Federal Reserve cut interest rates again by 75 basis points in its attempt to aggressively tackle economic and credit problems in the market. The central bank lowered the fed funds target rate to 2.25%, which brings the total cuts since September to 3 full percentage points.

The Federal Reserve continues to be under intense political pressure to bail out the banking system and the economy. There's not been a serious recession in more than 25 years and neither the Republicans nor the Democrats want one going into the election.

The government is doing all it can to make it look like it's helping out the average citizen by supporting the economy with lower interest rates, large cash infusions and handing out cash to families so that they can do their part in supporting the economy.

One problem -- where are they going to find the billions of dollars necessary to fund these programs? Somebody somewhere is gone have to pay for all this. Handouts are never free, and the U.S. is already borrowing more than $2 billion every day from foreign creditors. That will likely cause our $400 billion federal deficit to expand rapidly. This raises the question of whether foreign countries will continue to purchase our depreciating assets going forward. Foreign holdings of federal debt reached 45% in 2007.

Unfortunately, it is an election year and the government, along with the Federal Reserve, looks like it is ready to do whatever it will take to make voters believe they have everything under control. The problem is after all these bailouts are over and the election is in the past, the cross hairs will be back on Americans to pay for all of these bailouts with more tax increases.

OK, back to the markets. Over the last week, I been talking about how short-term indicators were in extreme territory and we were due for a very sharp bounce higher in the market. We certainly got that yesterday, and now readers are asking how much higher we could go in the short term. I want to make it clear that although my short-term indicators are very positive, the intermediate- and long-term indicators are still neutral to negative.

Yesterday was a decisively strong day, with stocks and indices up across the board. The only major index that wasn't up more than 4% was the Dow Jones industrial Average. Today, let's take a look at the upside potential over the next couple of weeks.

S&P 500

Click here for larger image.

Source: TC2000

The S&P 500 undercut its January lows on Monday during the Bear Stearns (BSC - commentary - Cramer's Take) debacle and quickly rebounded on heavy volume Tuesday.

The first level of light resistance is at the 50-day moving average around 1350. With the extreme oversold readings, there is a good possibility that we will break through that and test the intermediate-term resistance level around 1400.

Only a break above that would change the intermediate term from down to up.

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Dow Jones Industrial Average

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Source: TC2000

The Dow was one of the weaker indices yesterday, moving up 3.5%. The Dow did not undercut January's lows this week, but it has formed a short-term double bottom.

It is currently sitting at some resistance just below the 50-day moving average, but it is likely to test resistance in the 12,750 area in the short term.

The Dow would also need a break decisively above this level to change the intermediate-term trend.

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Nasdaq Composite

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Source: TC2000

The Nasdaq Composite had been one of the weaker indexes, but yesterday it showed some impressive gains. Resistance lies between 2300 and 2400.

The bottom of the chart shows that the money stream continues to be very weak and is not leading to the upside. We need to see this change if there's to be a significant rally ahead.

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Small Cap 600 Index

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Source: TC2000

The S&P Small Cap 600 Index has also formed a double bottom and is now nearing short-term resistance.

I've said before that this index will likely lead the way of any improvement in the economy. For that we would want to see a clear break above the 380 level.

That could be a good signal that the intermediate- to long-term situation is changing.

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I continue to believe that the government and Federal Reserve will do whatever it takes to protect the economy and have a strong market going into this year's election. Whether that happens or not is to be seen, and that is why it's important to use protective sell stops let the action of the market guide your investment decisions.

The problem with all of these short-term fixes is that Americans are going to have to pay for it with a weaker currency, higher taxes and increased inflation. This has happened throughout history, and don't let anyone tell you it will be different this time.

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At time of publication, Manning had no positions in the stocks mentioned, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.