Rhodes Report Nov 18

The world markets are in "risk on" mode on options expiration Friday. This, after two days of a very nasty shakeout, which hasn’t done much damage to the technical picture – but certainly major of the various indices are sitting on major support that must hold. If not, then we could be forced to abandon our bullish view and consider the bearish side in some way shape or form. We do believe there will be a top associated with the European debt crisis, but from higher prices as it generally occurs after the earthquake of any financial crisis – this time because of higher European yields as the economies start to show cracks as the debt load becomes more onerous. Outside of this, the weekend lies ahead – and we wouldn’t be surprised to see some type of European unity accord coming into Sunday night. Perhaps we are a bit more optimistic than many, but the fact of the matter is that Europe is painted into a corner and they must do certain things or lose the Euro far sooner than they are wont to do. This doesn’t mean it won’t occur; it just means we think it is some year or years off.

Trading strategy: From a trading perspective, we have done all we shall be doing in terms of buying until prices rise sufficiently to warrant adding to our trades. We are however, watching the 1200-to-1208 zone carefully, and we’ve expanded it a bit to capture the 50-dma. Therefore, we shall sit tight and allow today to transpire and reconsider our alternatives next week.

Stocks: The Fed “Twist” remains in place, with the prospect for QE-3 very much on the table in our opinion — especially if the employment figures continue to show weakness. This likelihood, coupled with the lingering questions regarding the European debt contagion, and decelerating world economy — including China — should allow stocks to climb the Wall of Worry in the weeks and months ahead. But make no mistake, this is simply a rally within a bear market.

Strategy: Technically speaking, the S&P 500 has broken back above the major long-term resistance zone between the 15-mma/45-mema zone between 1243/1189; which is critical given it delineates bull & bear markets. The recent correction back to the 380-dema at 1208 found support, and led to a test of the highs. That is failing; now 1208 is important.