It happened; the S&P 500 (SPX) started Friday above the first key resistance level at 3,810 and a frantic short covering rally ensued, says Jon Markman, editor of Strategic Advantage.

The benchmark index raced all the way to 3,911, a gain of 3.1%. For the week the index was up 6.5%.

This is a tricky point for traders. The Federal Reserve continues to talk tough about fighting inflation. James Bullard, president of the St. Louis Fed said Friday he would prefer short-term interest rates to rise in 2022 by an additional 2%. That kind of jawboning this week sent oil, copper, steel, and even wheat prices reeling lower.

Almost overnight, traders went from worrying about inflation and recession to optimism the Fed has everything under control. The change may feel like a major shift in sentiment, however, bear market rallies are supposed to be extreme. They occur when bulls will not sell and bears clamor to cover a short position.

Following the early breakout on Friday, the sharp advance to 3,900 was never really in doubt. However, with the index now back in the major resistance zone, bears should feel better about reloading short positions. Critical support for the S&P is 3,810. On the flip side, if bulls hold Friday’s gains, there is no major resistance until 4,025.

SA TradeView: We added theProShares UltraShort S&P 500 (SDS) at $48.70 Friday. The SDS closed at 47.13. The S&P 500 should reverse from current levels, however, we are not married to any position. If there is no backtrack Monday I will make provisions to exit the SDS and reassess.

Current: Long ProShares UltraShort S&P 500 (SDS) from $48.70. Target is $57.10; stop is $45.20 (after 11:00 am ET).

The Upshot

The Dow (DJI) climbed 2.7% to 31,500.68and the Nasdaq (IXIC) was 3.3% higher at 11,607.62. For the week, the three major indexes logged gains, with the Dow rising 5.4%, the S&P 500 climbing 6.5% and the Nasdaq ending 7.5% higher.

All sectors were in the green, led by materials.

Breadth favored advancers 3-1, and there were 42 new highs vs 183 new lows. The leaders were Eli Lilly (LLY), Bristol-Myers Squibb (BMY), Vertex Pharmaceuticals (VRTX), Li Auto (LI), and WP Carey (WPC). Finally some decent leadership.

The US ten-year yield rose 6.6 basis points to 3.14% after touching 3.49% last week. West Texas Intermediate crude oil futures climbed 3.2% to $107.58 per barrel but were still well below more than $120 per barrel reached earlier this month.

The University of Michigan consumer sentiment index was revised down Friday to a record low of 50 for June from 50.2 in the preliminary estimate, compared with forecasts for no revision in a survey compiled by Bloomberg. The index was at 58.4 in May.

The year-ahead inflation expectations eased to 5.3% in June from a preliminary reading of 5.4%, according to the survey results.

"We see a relief rally" led by cyclical growth—mostly technology—to 4,150 for the S&P 500 in summer "as oil prices fall and the market looks ahead to a possible Fed rate pause" at its December meeting, a research note from Stifel said Friday.

The process of bringing down inflation could be "painful" but the Federal Open Market Committee must continue to lift the federal funds rate to prevent inflation expectations from becoming further entrenched, Bullard said Friday. Bullard said he would like to see the federal funds rate closer to 3.5% by the end of 2022. With the range currently at 1.5% to 1.75%, that would require a further 175 to 200 basis points of total tightening during the last four meetings this year. He also played down the possibility of a recession.

The biggest gainer on the Dow was Salesforce (CRM), with shares up 7.4%.

Among the top gainers on the S&P 500 was Carnival (CCL), which reported a narrower fiscal Q2 net loss versus a year ago as sales jumped. Shares of the cruise liner jumped 12.4%. Other cruise stocks dominated the S&P 500 with Royal Caribbean Group (RCL) up 15.8% and Norwegian Cruise Line Holdings (NCLH) up 15.4%.

Learn more about Jon Markman here...