Dr. Melvin Pasternak, StreetAuthority Swing Trader newsletter - Despite the recent rally, investor sentiment remains surprisingly pessimistic

Dr. Melvin Pasternak, editor of the StreetAuthority Swing Trader newsletter, discusses two companies that announced better-than-expected earnings and the Fed’s release of its Beige Book report. Discover why this featured expert sees the earnings announcement and the report as catalysts for the recent S&P advance. Then check out a sampling of stocks from Pasternak’s Short-term Trading Ideas section. The Primary Trend from October 16, The S&P 500 continues to grind its way higher. After stalling at the beginning of this past trading week and meandering in a narrow range between 1344.57 and 1354.23, the index broke out strongly on Thursday. There were two catalysts for Thursday's advance. First two consumer stocks -- Yum Brands (YUM) and Costco Wholesale (COST) -- announced better-than-expected earnings. The shares of both shot higher. Next, the Fed released its Beige Book report, which discussed economic trends in all 12 U.S. economic regions. The report appeared to have been authored by Gold E. Locks. It concluded that there while there were pockets of economic strength and weakness across the country, there was little evidence of a significant slowdown in economic growth. Furthermore, it stated there were "few signs of increased price pressure." The market reacted enthusiastically, as the report increased the odds the Fed will not need to raise interest rates further. At the same time, it also showed that economic growth is not going off the edge of a cliff. Friday's release of the headline retail sales number prompted some minor profit taking at the opening. But by the end of trading, the S&P ended nearly three points higher at a new five-year record. The headline retail sales number was deceptive, as a -9.3% plunge in gasoline prices prompted overall retail sales to drop a hefty -0.4%. Excluding gasoline, however, the number actually rose +0.6%, a strong gain. As the S&P's tide continues to rise, the boats of other lagging stock market averages continue to float higher. That increases the odds that the technical divergence between the large-cap S&P 500 and Dow Jones Industrials on the one hand and the small-cap Russell 2000 Index and the Dow Jones Transportation Average will be resolved positively. The Russell 2000 gained nearly 23 points this past week and is now only about 25 points below its spring high. Two weeks ago it was 6% below its May peak, while this week it is about 2.5% below that pinnacle. The Transports likewise gained just over 88 points points. They moved from nearly 10% off their May 5013.67 peak to about 7% below it. Despite the recent rally, investor sentiment remains surprisingly pessimistic. The high level of skepticism on this contrary indicator implies that there is money on the sidelines that can chase stocks higher. Before the current rally comes to an end, the S&P 500 will need to breach three key technical levels. The first is 1340, a level of minor resistance between September 27th and October 3rd. The S&P approached the 1340 level on Wednesday when aluminum giant Alcoa (AA) released earnings that fell below expectations. However, the S&P hit an intraday low of 1343.57 -- well above 1340 support. The next key technical support below that is the May 8th peak of 1326.70. On October 3rd, the S&P tested and held that key breakout level, reaching a low of 1327.10. It has gained nearly 40 points in less than two weeks since that test occurred. The third and most important sign of a breakdown in the current rally would be a violation of the Intermediate uptrend line drawn from the mid-July 1224.54 low. That trendline currently crosses the chart at 1334. As of Friday's close, the S&P was a healthy 30-plus points above that trendline. The weekly chart of the S&P 500 continues to show a strong Intermediate uptrend. Since hitting its mid-June low of 1219.29, the S&P has gained nearly 140 points. It has completed its base in impressive fashion, soaring nearing 40 points beyond its May 8th peak of 1326.70. The S&P 500 is trading above all key moving averages. Most of the moving averages are sloping gently higher, but the 10-week at 1315 is sloping strongly upward, reflecting an Intermediate-term uptrend that is now almost five months long. Because the market is now approaching highs that haven't been seen in more than five years, it is difficult to talk about technical resistance above current prices. On an Intermediate and Major basis, the trend is clearly up. The weekly indicators are bullish. They remain overbought, but so far show no signs of deteriorating. For the third straight week, the S&P 500 has closed outside its upper weekly Bollinger band, which is now at 1359. A close outside the upper band is a continuation signal, so this indicator implies that the index should continue higher. ADX and MACD remain on solid buy signals. The black ADX line is curving higher for the first time in many months -- a bullish sign. Weekly MACD is also approaching its mid-May peak and is close to resolving one of the signs of technical divergence Dr. Melvin Pasternak was concerned about. Stochastics is highly overbought, with %K at 97. This indicator has been above the overbought 80 level since August, but yet the S&P has climbed higher. CCI is at a very overbought level of +172. RSI continues to trend upwards, finishing last week at 67. From the perspective of RSI, the S&P has room to advance somewhat before becoming extremely overbought. Short-term Trading Ideas include… Long Candidates: Kellogg (K) is a well-known maker of breakfast cereals and other packaged foods. The shares remain in a strong uptrend and are trading above several key moving averages. Despite Friday's sell-off the shares remain above rising 150- and 200-day upward sloping moving averages. Intevac (IVAC) provides equipment to manufacturers of hard disk drives. After approaching the $26 level in mid-July, the shares then slipped to a low of $14.66 in early September. Dr. Pasternak entered a long position in the stock at $17.12 on October 2nd. IVAC now appears to be basing. Agilent Technologies (A) is a manufacturer of scientific measuring instruments. The stock peaked in late April at $39.54 and hit a low of $26.96 in August. Agilent is now roaring back and has gone above its 150-day moving average. The stock just completed a base at $33.50. This article highlights the commentary of Dr. Melvin Pasternak for the Zacks.com audience. Dr. Melvin Pasternak provides insightful analysis, market commentary, and favorite recommendations on a timely basis in "StreetAuthority Swing Trader" newsletter. 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