BERNANKE AND COUNTYWIDE FINANCIAL BOOST MARKET -- THE DOW AND S&P 500 ALSO BOUNCE OFF THEIR AUGUST LOWS -- SILVER HITS 28-YEAR HIGH

BERNANKE BOUNCE ... The stock market continued the short-term bounce that began with yesterday's upside reversal day. The 5-minute bars in Chart 1 show two bursts of buying taking place at 12:15 and 2:15 in the S&P 500 SPDRs. The 12:15 spurt came courtesy of Fed chief Bernanke's promise to take "substantive" action to boost the faltering economy. The 2:15 buying came on reports that Bank of America might take over Countrywide Financial. That report pushed CFC more than 50% higher in heavy afternoon trading (Chart 2). That gave a boost to the entire financial sector, which led the day's market gains. Yesterday, Arthur Hill wrote about an oversold market that might be ready to attempt a rebound. Mr. Bernanke and Countrywide gave the market a reason to rally today. There's another technical reason why the market is attempting a rebound. It's testing support at its summer lows.

Chart 1

Chart 2

DOW BOUNCES OFF AUGUST INTRA-DAY LOW... The daily bars in Chart 3 show the Dow Industrials bouncing off their August intra-day low near 12500. That's a very important test. At no time in the last five years has the Dow broken a prior reaction low after hitting a new high. With the Dow having hit a new high during October, the August low becomes especially important. The Dow needs to stay above that level to prevent a major bear signal from taking place. That doesn't remove the threat of a bear market, especially with so many long-term technical indicators having turned negative. But it has prevented one from actually starting this week. The first hurdle the Dow needs to overcome is the "neckline" drawn under its August/November lows (see Chart 3). If it can accomplish that, there's more overhead resistance starting at 13100 which represents the mid-December reaction low (see arrow).

Chart 3

S&P 500 TRYS TO REGAIN 400-DAY LINE ... The chart of the S&P 500 is similar to that of the Dow. Chart 4 shows the SPX bouncing off its August low at 1370. It's trying to climb back over its 400-day moving average (green line). If it can do that, there more overhead supply starting at 1440. I'm skeptical about how far the market can rally from current levels. But we'll keep an open mind and see what it can do during the rest of January. Remember that "as goes January, so goes the year".

Chart 4

SILVER BREAKS OUT ... Gold rose another $18 to hit a new record. Gold stocks gained more than 2%. The metal star of the day, however, was silver. Chart 5 shows the Silver iShares (SLV) breaking out to the highest level in 28 years. Precious metals keep feeding off a weaker dollar (which fell again today) and the prospect for more Fed easing. Precious metals shine in a environment of falling interest rates.

Chart 5