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Democrats may feel pressure, not just bears

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As painful as the recent three-session 460-point rally in the Dow Industrials (INDU) 8,791 +2.2% has been for bears, today's 190- point gain in the Dow Industrials and bullishness in the major market averages may also put some pressure on Democrats as traders cite partial reason for today's gains being President Bush's tax package, which doubled over the weekend.

The Bush tax package "doubled" over the weekend as President Bush leaned toward proposing the total elimination of taxes on corporate dividends paid to shareholders. Administration officials had previously indicated the entire plan would likely reduce government revenues by around $300 billion over the next decade, with the tax on dividends likely to be cut in half.

House Democrats were set to release details of their plan later today, but today's market response is viewed by some as a response from the markets that it likes Bush's plan for a more aggressive stance on tax-cuts than the current tax code.

The elimination of the dividend tax that has been proposed by the Bush administration, the package's signature proposal, is sure to draw a partisan fight with Democrats, who argue that the Bush plan will exacerbate the deficit, do little to boost the economy in the near term and offer few benefits for middle and lower- income Americans.

The Bush tax package is also expected to include an acceleration of personal income tax rate cuts scheduled to take effect in 2004 and 2006. The package, which Bush will formally unveil at a Tuesday speech in Chicago, will also include an extension of federal unemployment benefits, an immediate increase in the child care tax credit; a more rapid reduction in the so-called marriage penalty and grants to cash-strapped state governments, the Times said.

Republican strategists say that the measures will boost job growth and investment. They have long argued that dividends face "double taxation" - first as corporate profits, then as individual income.

I will have to call today's action as being technically bullish and some levels that I didn't think should be traded have not only been traded, but violated to the degree that bearish traders that may be over-leveraged on the bearish side may now begin to find pressure building in their accounts, on a scenario of more aggressive tax cuts that may not have been thought of, or at least accounted for.

I'm not just talking about OptionInvestor.com subscribership either.

The S&P 500 Index (SPX.X) 931.65 +2.53% has broken above its November 6 high of 925.66, and was a level that many bearish market technicians felt would hold as resistance on the thought of a "head and shoulders top" for this broader market index.

While the Dow Industrials (INDU) 8,795 +2.25% has found late- session resistance at the 8,800 level, which would also be the head and shoulders top formation and right shoulder of 8,800, the ability of the broader SPX to make the move higher should have bearish trader in the Dow Industrials and other indexes somewhat cautious here and not looking to add to new bearish positions at this point.

In this afternoon's market monitor, I performed a preliminary daily pivot analysis for the Dow Industrials and it would currently take below the 8,734 level to see any type of weakness below a short-term pivot. As such, with the Dow holding its session highs, I believe no further bearish positions should be established at this point and look for some type of intra-day weakness below a level of support to actually be violated. Something that hasn't been seen since the recent rally began last Thursday.

In the past three session's, the indexes have gone from what looked to be a short-term "oversold" level to what now appears to be short-term "overbought" as many of the indexes now trade at or above their upper Bollinger bands. Still, I would want to see at least one intra-day pivot level of support be violated at this point to signal any type of weakness.

Jeff Bailey

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