FED REVERSAL ON POSSIBLE LOAN TO AIG GIVES MARKET LATE BOOST ON HEAVY VOLUME -- S&P 500 RETRACES 50% OF 2002-2007 BULL RUN

FED MAY HELP AIG... The Fed's made two important decisions. One was to leave interest rates unchanged. The other was a late Bloomberg report that the Fed is considering a "loan package" to AIG. That report may have contributed to the late market rebound. Financials were the biggest winners. Chart 1 shows the Financials SPDR closing 4% higher today. That led to a big volume day and a short-term upside reversal day. It remains to be seen if that short-term bounce has any upside follow-through tomorrow. There's a lot of overhead resistance just above the market. In other markets, the Fed decision to leave rates unchanged caused a late selloff in bond prices and a bounce in bond yields. The dollar strengthened and commodities weakened. Today's action didn't change any price trends, but suggests that yesterday's stock meltdown was overdone.

Chart 1

Chart 2

S&P 500 REACHES 50% RETRACEMENT LEVEL ... Fibonacci retracement lines allow us to find potential downside targets in a bear market. One of our main downside targets since the market peaked last year has been a 50% retracement of the 2003-2007 bull run. The monthly bars in Chart 3 show that the S&P has reached that downside target near 1170. That could act as potential support area. If it doesn't, the next downside target would be a 62% retracement near 1075. The fact that the 9-month RSI line is moving into oversold territory also shows the market in the most oversold condition since late 2002. Those two factors argue against turning too bearish at this point in time.

Chart 3