STOCKS RALLY AFTER FED STATEMENT FINANCIALS LEAD HIGHER HHH AND SMH HIT RESISTANCE BONDS SURGE AS RATES PLUNGE DOLLAR PLUNGES IN RESPONSE TO FED GOLD REVERSES TO CLOSE STRONG BONDS SURGE ON BOND PURCHASE PLAN

FED STATEMENT STOKES THE BULLS... Stocks surged after the Fed announced plans to buy long-term Treasury bonds and increase its purchases of mortgage-backed securities. With today's announcement, the Fed is set to expand its balance sheet by over $1 trillion. With the money spigot open, the S&P 500 ETF (SPY) surged over 2% and the Russell 2000 ETF (IWM) was up over 3%. Chart 1 shows SPY surging to 80 over the last nine sessions. The ETF is now up over 15% from low to high. Even though the run looks strong, SPY is now trading at resistance from broken support and the falling 50-day moving average. In addition, the Commodity Channel Index (CCI) moved above 100 to become overbought for the third time this year. With the ETF at resistance and momentum overbought, the odds of a pullback or consolidation are above average. Chart 2 shows the Russell 2000 ETF (IWM) with similar characteristics.

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FINANCIALS LEAD THE WAY HIGHER... Chart 3 shows the Financials SPDR (XLF) surging above its 50-day moving average for the first time since September. Financial stocks led the way higher as XLF surged over 10% on Wednesday and the Regional Bank HOLDRS (RKH) was up over 11%. Chart 4 shows RKH breaking above its 50-day moving average for the first time since September. Even though the surge over the last two weeks is mighty impressive, XLF and RKH are also short-term overbought. RKH is up over 70% in eight days, while XLF is up over 50%.

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INTERNET HOLDRS HITS RESISTANCE... Chart 5 shows the Internet HOLDRS (HHH) hitting resistance around 35 for the third time this year. Despite a big gain for the overall market, HHH eked out a relatively small gain and underperformed on Wednesday. HHH moved above 35 intraday, but fell back as selling pressure took hold. For those using candlesticks, a shooting star pattern formed today and this could foreshadow a pullback. Medium-term, the pattern at work looks like a bullish ascending triangle. A break above resistance would signal a continuation higher and target a move towards the falling 200-day moving average.

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SEMIS SURGE TO RESISTANCE... Chart 6 shows the Semiconductor HOLDRS (SMH) surging to resistance around 19 for the third time this year. In contrast to the Internet HOLDRS, SMH advanced almost 3% to show relative strength. Even though the rally off support looks strong, the ETF is already up over 15% in two weeks and resistance is at hand. This could lead to a pullback or consolidation before another breakout attempt. A breakout would argue for further strength toward the falling 200-day moving average.

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BONDS SURGE AND RATES PLUNGE... The iShares 20+Yr T-Bond ETF (TLT) surged and the 10-Year Note Yield ($TNX) plunged on news that the Fed would purchase $300 billion of long-term Treasuries. With massive financing needs ahead for the US government, the bond market was rightfully concerned with supply depressing prices. The $300-billion purchase will soak up a lot of supply. Just as important, the rise in bond prices pushed rates lower. Chart 7 shows the 10-Year Note Yield moving to resistance around 3% and stalling the last seven weeks. An ascending triangle appeared to be taking shape, but a breakout never materialized. Today's plunge pushed the 10-Year Note Yield below 2.6% (26), which is the lowest level since early January. Chart 8 shows TLT bouncing off support just above 100. The ETF surged above 108 intraday, but fell back to close below 105. On a closing basis, TLT remains within the consolidation.

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DOLLAR FALLS AFTER FED STATEMENT... The U.S. Dollar Index ($USD) plunged after the Fed's policy statement. At the heart of this decline is the Fed's decision to expand its balance sheet by $1 trillion. This quantitative easing provides liquidity to the credit markets, pushes key interest rates lower and increases the money supply. All three weighed on the dollar today. More liquidity increases the appetite for risk (euro and yen). Lower interest rates make dollar-denominated assets less attractive. Increasing the money supply dilutes the value of the currency. It was a triple whammy for the greenback. Chart 9 shows the U.S. Dollar Index ($USD) plunging over 2% and breaking below its 50-day moving average. The rising 200-day moving average and the July trend line converge to mark support in the low 80s. Chart 10 shows monthly bars over the last 10 years. The surge in late 2008 broke a major trend line and the 40-month moving average. The 2004-2005 lows and the 40-month moving average confirm support in the lows 80s.

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GOLD SURGES AS DOLLAR PLUNGES... It was a wild day for gold. The yellow metal was down sharply in early trading, but surged after the Fed statement. Before moving to the charts, let's review the relationship between gold and the dollar. Historically, gold and the dollar have been negatively correlated. Gold moved higher when the dollar moved lower and vice versa. Chart 12 shows gold and the U.S. Dollar Index ($USD) over the last three years. The price plots form a mirror image from April 2006 until December 2008. This negative correlation turned positive in early 2009. Chart 13 shows the shows the US Dollar Bullish ETF (UUP) and the Gold SPDR (GLD) over the last six months. Notice that both moved higher from mid January until late February. Gold and the dollar were positively correlated during this time frame. However, recent indications suggest that this positive relationship could be poised to turn negative again. Notice that gold moved sharply higher (red) and the dollar moved sharply lower over the last few days. Perhaps gold smells inflation in today's policy statement from the Fed.

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GOLD FORMS MASSIVE ENGULFING PATTERN... Chart 14 shows the Gold SPDR (GLD) with a huge bullish engulfing pattern today. The ETF opened below 89 and closed above 93. From low to high, the ETF surged over 7% today. The long white candlestick engulfed the prior four candlesticks and solidifies support around 87.5. The technical picture has not changed much from last week. Broken resistance around 87.5 turned into support and GLD held this support area the last three weeks. The 20-period CCI became oversold last week and edged higher over the last few days. Chart 15 shows weekly bars with GLD holding above the rising 40-week moving average. Moreover, the channel breakout is holding after today's big move.

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