The Fed surprised investors Thursday after the equity markets closed, announcing that they are increasing short-term discount rates a quarter percent to .75%. The dollar immediately spiked after the announcement, causing a sharp pullback in the Euro as well as equity futures. By Friday morning however, most of the gains had been given back as the Euro rebounded and so did the market futures. Friday was a relatively quiet, low-volume day considering it was February expiration.

This week we want to refer back to a blog post we did in early December regarding our analysis of the 1929 market crash versus the 2008 crash. You can view the original post here:
http://www.smallcapvisions.com/scv-blog/42-1929-vs-2009

At the end of the post you will see that we have added an updated chart. Looking at this chart, we can see that the DOW is once again testing this level of 10,500. Our feeling is that failure to break through this level could signal sideways to down action for the remainder of the year. It would also leave our analysis intact, meaning that the last year and a half of price action in equities has coincided almost perfectly with the 1929 crash and bear market rally. Eventually, the DOW lost 86% of its value before bottoming out in 1932.

With that said, the DOW breaking through 10,500 on strong volume would be a very bullish sign for the remainder of 2010. Failure to do so could mean equities begin a slow, steady pullback. If the Fed continues to raise interest rates this could also have a negative effect on the value of equities. We are waiting to see how this critical level plays out.

The Russell enjoyed another strong week thanks to an improved dollar as well as continued upside in equities. The index closed the week at 631, slicing through the 625 level with no problems on Thursday. Look for a pullback early this week to this level. If the dollar can remain strong, it will be possible for the index to retest the January highs of 650 within the next few weeks.