STOCKS REACT POSITIVELY TO THE FED -- DIA CONFIRMS HAMMER - FINANCE LEADS THE WAY -- BONDS RECOVER AFTER FED ANNOUNCEMENT -- US DOLLAR INDEX DECLINES -- GOLD ADVANCES FOR SIXTH STRAIGHT DAY -- CAT IS BACK

STOCKS SURGE AFTER FED ANNOUNCEMENT... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor

The Federal Open Market Committee (FOMC) kept the fed-funds rate unchanged and stocks greeted the news with a big advance. The policy statement noted that there were signs of a weakening economy and that inflationary pressures remained. Even so, Wall Street liked what it heard and rallied immediately after the announcement. All major indices moved higher with the Nasdaq and NYSE Composite leading the charge. Both indices broke above their 9-Mar highs on Tuesday and exceeded their 50-day moving averages on Wednesday. Today's volume was the highest level seen this week, but below the levels seen last week. Nasdaq volume exceeded 2 billion shares and this was respectable, but NYSE volume fell short well short of the 2 billion share mark and was not impressive.

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DIA FOLLOWS THROUGH ON HAMMER... What a difference six days makes. We saw a big reversal day on above average volume last Wednesday (14-Mar) and now a follow through advance on good volume. For example, the Dow Diamonds (DIA) formed a long hammer on 14-March with high volume and then surged back to its 50-day moving average today. The bulls are making a statement, but DIA still has resistance at 125 to content with over the next few days. This resistance area stems from broken support and the 50-day. In addition, today's follow through surge occurred on relatively low volume.

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FINANCE LEADS THE CHARGE ... The Finance sector is one of the most interest rate sensitive sectors and this sector was the best performing sector on Wednesday. Banks and brokers had been under pressure after the sub-prime lending problems and the Fed statement provided a big boost of confidence. XLF found support near its 200-day moving average over the last three weeks and surged back to its 50-day moving average on good volume. While this bounce is impressive, keep in mind that XLF is already hitting resistance from the 50-day moving average and broken support around 36.5.

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Morgan Stanley (MS) reported stellar earnings and surged over 6%. The stock gapped up and closed strong on the highest volume in over a year. The gap was enough to fill the late February gap and create a rather large island reversal. Traders with short positions between the gaps are now trapped on that price island with losses. The move was also enough to break the 50-day moving average and the gap is bullish as long as it holds.

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BONDS RECOVERY AFTER EARLY LOSSES ... The bond market is also sensitive to interest rates and changes in Fed policy. Bonds move counter to interest rates by advancing when rates decline and declining when rates advance. The iShares ~20-year T-Bond Fund (TLT) started the day with a sharp move lower, but recovered all of its losses and closed with a small gain. The big recovery surge occurred right after the Fed announcement and initial indications suggest that the next Fed move may be to lower rates. TLT surged to resistance in February and then consolidated the last 3-4 weeks. The March lows establish support around 88.5 and there is resistance around 90.7 from the December and March highs. A break above 91 would be bullish for bonds and this would signal another fall in interest rates.

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DOLLAR IS NOT IMPRESSED WITH THE FED ... While bonds like lower interest rates, the US Dollar Index is not so fond of lower interest rates. The first chart shows that interest rates and the US Dollar Index have been rising and falling together since October. The next chart shows the US Dollar Index as its sinks further towards its early December low. I would like to call this support, but the trend is clearly down and support levels are only potential. Resistance levels are what really count. The index failed at its 200-day moving average in late January and early February, broke its 50-day moving average in mid February and the 50-day turned into resistance in March. There is no reason to get excited about the US Dollar Index as long as it remains below both key moving averages.

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GOLD BENEFITS FROM WEAK DOLLAR... The relationship between the US Dollar Index and gold has been rocky over the last six months, but the general trend has been up for gold and down for the Dollar. This inverse relationship got another boost over the last two weeks as gold surged above $65 and the US Dollar Index dropped below 83. The StreetTracks Gold ETF (GLD) found support between its 50-day and 200-day moving averages in March and advanced the last six days. The move filled the early March gap and gold is showing strength once again.

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CATERPILLER RECAPTURES THE 200-DAY... Caterpiller (CAT) was one of the big Dow movers with a 2% gain today. The stock surged above 68 earlier this year and then declined back to the 50-day moving average in early March. CAT found support from broken resistance and the 50-day over the last few weeks and surged this week. It all started with a gap on Monday and continued with big moves the last two days. CAT is back above the 200-day moving average and showing strength once again.

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