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Halftime Report: Is Dollar Oversold & Market Overbought?

Both the Dow and S&P 500 rose Tuesday with energy shares leading the way after dollar weakness boosted oil and metal prices. U.S. Steel was among the big winners after BofA-Merrill upgraded the company s to "neutral" from "underperform."

But with a Fed policy meeting underway and a G20 summit coming later this week, some investors are skeptical that Tuesday's gains will hold.

How come?

Instant Insights with the Fast Money traders

Much of the S&P 500 relies on a weak dollar, reminds Mike Gurka of Empower Global Funds. However there’s chatter of a coordinated move to prop up the dollar and that could make investors very nervous. I think we may be looking at an oversold dollar and an overbought stock market.

With so much of the S&P reliant on a weak dollar, I’d also watch the move in the dollar quite closely, adds Brian Kelly of Kanundrum Research. If it reverses substantially it could signal the end of this rally.

(Click here to find out about other catalysts that could signal the end of the rally in BEHIND THE MONEY: Solving the Correction Cliffhanger; How Will This Rally End? )

Some retailers were slightly higher on Tuesday partly because Citi upgraded Macy’s to buy, explains Patty Edwards of Storehouse Partners. Also I think investors are looking at dollar weakness and saying maybe there will be some margin improvements. But frankly when I look at the consumer all I see is people strapped for cash and that’s bearish.

But there’s also a psychological aspect to retail, counters Zach Karabell of RiverTwice. As they hear unemployment isn’t getting worse they become more comfortable spending.

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DOLLAR DECLINE LIFTS COMMODITIES

The weak dollar provided a tailwind for oil prices, which rose above $71 a barrel on Tuesday. Copper was another beneficiary with shares jumping substantially.

Meanwhile, the euro reached a one-year high against the U.S. dollar as dealers took advantage of the greenback's gains from the previous session to resume selling ahead of the Fed meeting.

Also the price of gold rose toward $1,020 an ounce on Tuesday as a sharp deterioration of the dollar's value triggered investment buying in gold as a currency hedge.

What’s the trade?

I don’t think gold is the best metal play, says Pete Najarian. Instead I’d play copper with Freeport McMoRan.

I’m not that excited about gold either, says Zach Karabell. But copper is an infrastructure play. I like it.

Or look at coal as a play on emerging market growth, adds Najarian.

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TECH CONTINUES HIGHER...PALM JUMPS

Shares of Palm jumped on Tuesday likely buoyed by rumors that Palm's recently announced secondary offering would price on Tuesday, says Avian Securities analyst Matthew Thornton.

Also published reports suggest that Palm may be talking with Nokia about a possible merger.

What must you know?

Options volume in Palm has been explosive, explains Pete Najarian. But if you trade this stock keep in mind there’s about 30% short interest in the name.

I wouldn’t buy any stock on rumors, adds Patty Edwards. In the smartphone space I like Apple and RIM better.

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BANKS UP AHEAD OF FED STATEMENT

Shares of Bank of America led the financials higher after published reports cited widely followed analyst Dick Bove as saying ‘critics are all wrong and that the Merrill deal was great for Bank of America's shareholders.’

What’s the trade?

It seems to me the last quarter worked out well for Bank of America, muses Mike Gurka, but that’s where I think it stops for them.

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TRADE TO GO: RETAIL PLAY

Pete Najarian suggests putting TJ Maxx on your radar.

The stock just hit a 52-week high and they just announced a massive buyback, he explains. Their same-store sales continue to impress. There’s no options action but when I look at their P/E and earnings potential it just seems to me they’re doing everything right.

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CALL THE CLOSE

Pete Najarian: There’s so much downside protection in place I think the market goes higher.

Patricia Edwards: I’m market neutral with some longs in select names.

Zach Karabell: I’m a buyer of certain stocks with protection.

Mike Gurka: I’m short S&P and getting long the dollar.


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Trader disclosure: On Sept. 22nd, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour And Seygem Asset Management Own (MTL); Seymour Owns (AAPL), (BAC), (VALE); Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Najarian Owns (C) Calls; Najarian Owns (JPM) And Is Short (JPM) Calls; Najarian Owns (MS) And Is Short (MS) Calls; Najarian Owns (MSFT) And Is Short (MSFT) Calls; Najarian Owns (PALM) Calls; Najarian Owns (RNWK) And (RNWK) Calls; Najarian Owns (SII) Call Spread; Najarian Owns (WFC) Put Spread; Najarian Owns (YHOO) Call Spread; Najarian Owns (FCX) And Is Short (FCX) Call; Najarian Owns (CELG); Najarian Owns (CLX) Calls; Terranova Owns (WFT). (F); Terranova Owns (F) Calls And (F) Puts

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