Stocks soared yesterday following an agreement by European Union leaders to increase their bailout fund to $1.4 trillion dollars, recapitalize their banks, and agree to a voluntary 50% hair-cut on Greek sovereign bonds. And the euro jumped 2.3% to $1.419, its best performance of the year.

The S&P 500 rose 3.43%, Nasdaq was up 3.32%, and the DJIA rose 2.86% backed by an increase in volume. The NYSE traded 1.4 billion shares and Nasdaq crossed 736 million shares—both significantly higher than the average daily volume of the last two weeks which was under 1 billion shares. Advancers exceeded decliners by 7-to-1 on the Big Board and 5-to-1 on Nasdaq.

Click to EnlargeTo put it mildly—Nasdaq had a technical breakout. But the close above its 200-day moving average does not establish a new bull market. However it does reinforce the bullish point of view by confirming that the near- and intermediate-term trends are now up. This should not shock us, as noted earlier this month, high-velocity rallies like this are common in bear markets. In fact bear-market rallies traditionally move faster and farther than bull-market rallies because bull markets plod without the accompanying volatility. The current rally is one of the fastest on record: The WSJ said that if yesterday was the last day of October, Nasdaq would have had its best month in points up since January 2001.

They failed to note that the rally in January 2001 was a bear-market rally.

It closed the month at 2,261—the bottom was not made until October 2002 at 1,108.

Click to EnlargeDespite some good economic news in the U.S., the focus of the rally was the deal in Europe. And it had a profound impact on the dollar—driving it to within .32 of its 2011 low. But note that the stochastic issued a buy signal, which is coincident with a gap that opened from 21.42 to 21.25. Gaps of this nature have a very high percentage close rate.

In other words look for a rally in the buck soon.

This week’s break from the resistance zone of 1,220 to 1,230 had a direct impact on the 500’s Relative Strength Index, bumping it to 65.12 from 58.80 in just one day.

Click to EnlargeAt prior tops this year the RSI hit 67.35 and 67.00. We could be just a day or two from hitting those numbers again.

Conclusion: Yesterday I took the unusual step of entering the following on the DTA comments section, “The probability of a ‘Buying Climax’ is very high. Fib 66.6% retracement of March high to Oct low takes us just above the 200-day moving average of the 500 at 1,275 and would be the flip side of the selling climax in early October.”

This message pertains to short-term trades only. We obviously did not get a reversal yesterday. But I want to alert our readers to the fact that conditions now exist that could, at anytime, result in a reversal down.

And a reversal from the current high levels could have almost as much impact as the reversal up that occurred just 3 ½ weeks ago.

Short sellers can either wait for the reversal or probe the market several times while being protected with stop-loss orders. But others may want to wait for a definite signal before shorting.

Finally, as we enter the last couple of days of October, there is a possibility that institutional buyers could commit cash reserves in an attempt to “not be left behind.” The stock market is in a high state of risk for both buyers and sellers. If you are uncomfortable taking new positions then sit it out until your comfort level returns.

Get Sam Collins’ trade of the day: This oversold “fracking” energy stock has breakout potential

Get Serge Berger’s take on the markets: Only a fool would chase this bear market rally.