Market Summary

The major indexes lost ground for the week but there was some optimism that Thursday's recovery by the S&P 500 from its intraday low to close higher than the day before signaled a potential market bottom. It will be several days before we know if that was truly the case. There was so much circumstantial evidence of market manipulation this week that it is more than unusually difficult to know where things will head from here. It stretches credibility that the markets could be down 3% on Thursday and then close almost flat immediately before the Fed cut the discount rate without the major brokerage houses being in the know. And, the rate cut was announced on options expiration Friday.

What seems to be clear is that the Fed could not risk a run on the Countrywide Bank (backed by a potentially insolvent Countrywide Financial) with FDIC insurance at stake. Also, the major banks and brokerages had just reluctantly loaned Countrywide $11.5 Billion. A bailout for these banks was essential because a collapse of Countrywide would wipe out the loan and further damage the stock price of the financial institutions involved.

The Fed's statement was notable for two reasons: (1) it confirmed the Fed understood the risks to the broader economy of the credit squeeze and was determined to act to prevent a recession; and (2) there was no longer any mention of inflation as a prime concern. This came just a few days after the last FOMC statement which discounted risks to the economy and emphasized inflation as the primary concern. In an accompanying statement Friday, they also said "The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower". This extension of repayment terms from 1-3 days to 30 days, renewable by the borrower confirms that they believe institutions need some time to sort out what their real exposures are. We conclude, therefore, that the Fed and Treasury will do whatever is necessary to protect the big Wall Street players, the health of system and the economy.

Given the choice between recession or inflation, the Fed will choose inflation. If this analysis is correct, then it is likely that Thursday was indeed the market bottom and that the indexes will continue to rise from here.

If so, there will be some profitable breakouts, at least in the short term, as stocks beaten down in their handle approach and exceed their pivot points. Our Top Tip this week suggests some strategies that will work well as the markets recover.

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Day and Swing Trading Provides Best Results in a Volatile Market

These volatile times are delivering good results for our TradeWatch day trade list. During August, buy at open/sell at close orders would have netted an average 3.87% daily.

Our Swing Trade selections have also made some impressive gains during August with an average gain to intraday high of 10.44%.

To trade cup with handle breakouts as the market rises, we suggest you focus on the stocks that meet our preferred set of filters which we described in our Newsletter of 11/12/05

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