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Pros: Mid-Day Reversal May Signal Rally Challenged

Wall Street edged higher in a volatile session on Thursday, torn between strong corporate earnings and a surge in the U.S. dollar.

By the end of the session, the Dow ended in positive territory but had also pared a 100 point gain after stocks made a bearish reversal midday.

Although the bulls attempted to push stocks above their 2010 highs, they could not prevail.

Perhaps most noteworthy was the action in Dow component Caterpillar which reversed lower despite posting a 96% jump in earnings and better than expected outlook.

What does the action mean?

Instant Insights with the Fast Money traders

Heading into the FOMC meeting I think there’s growing uncertainty about the size and pace of QE2, explains Joe Terranova. As a result I think money managers will pare down their positions and take profits in their winners. That could put a lid on the rally for at least the next 10 days. However I still think the overall market moves higher by the end of the year.

I think the Street may be ahead of itself in the belief that the Fed is coming out with a gargantuan qualitative easing policy, adds Steve Cortes. I think they are not. By no means is there unanimity in the Fed on this issue. On Thursday St. Louis Federal Reserve President James Bullard said, 'no decisions have been made and no decisions will be made until we get to the November meeting.'

I think a half a trillion is on the table, counters Brian Kelly. If you read Bernanke he talks about the need for a big and sustainable program for the market to believe it will work. I would use any sell-off on fears that QE2 isn’t big enough as a buying opportunity, he counsels.

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ALL ABOUT THE DOLLAR

As we mentioned above, the dollar advanced against a basket of currencies on Thursday, which most investors interpreted as bearish.

"The trade has been: Weak dollar is good for commodities and is good for any risk-related assets like equities. On dollar weakness, buy those things; on dollar strength, get out of those things," says Bill Strazzullo of Bell Curve in a Reuters interview.

How should you position now?

I think there are very good reasons to own the dollar, says Steve Cortes. The sell-off is way overdone.

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MARKET BUZZKILL: COMMODITIES

Commodities and natural resource stocks have been the most sensitive to moves in the dollar with gold , copper and oil all trading lower after the greenback gained.

Freeport was the rare exception to the rule and closed higher but gains were largely tied to a profit report that beat Wall Street estimates.

What’s the trade?

On a valuation basis FCX is still relatively inexpensive, says Guy Adami. However FCX is highly correlated to the price of copper. If you believe the dollar is near its bottom that bodes poorly for this stock. If you want to play it long I’d also buy put protection.

I expect FCX as well as BHP , CAT and other resource names to follow physical resources lower, says Steve Cortes. Don’t forget that during the intense stock market rally on Wednesday gold and oil did not participate to the same degree. I think that’s bearish.

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TOPPING THE TAPE: MCDONALD’S

Shares of McDonald’s closed higher on Thursday after the fast food giant wowed investors with better than expected earnings and September sales that came in far above Wall Street's expectations. Also the company forecast a jump in October that would also outpace analysts' targets.

What’s the trade?

I think this stock is resilient and I’d continue to own it, says Guy Adami.

I’d take profits here, counters Steve Cortes, but on a pullback I’m a buyer.

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PREPARE FOR TECH TURNDOWN?

Seems like the party this earnings season has been in tech with Amazon , eBay and Netflix all hitting 52-week highs on the backs of their reports. In fact 83% of tech companies have beaten analyst estimates.

But don’t get all giddy. Dan Niles of Alpha One tells Fast Money that the trend is coming to an end.

This is a conversation no investors should miss. Watch the video now!



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Trader disclosure: On Oct. 21, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Cortes owns (K); Cortes owns (TSN); Cortes is short crude oil; Cortes is short gold; Cortes is short (RSX); Cortes is short the U.K. Pound; Cortes owns U.S. Treasuries; Cortes owns the S&P 500; Terranova owns (APA), (AAPL), (AXP), (C), (CRM), (GOOG), (GS), (FCX), (MMM), (ORCL), (PCP), (PEP), (PFE), (TBT), (UPL), (VRTS), (XBI); Adami owns (AGU), (BTU), (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; Weiss owns (AAPL); Weiss owns (QCOM); Weiss owns (PWER); Weiss owns (VZ); Weiss owns (CSX)

For Joe Terranova
Terranova is chief market strategist of Virtus Investment Partners, LTD.
Virtus Investment Partners own more than 1% of (ABAX)
Virtus Investment Partners own more than 1% of (ALK)
Virtus Investment Partners own more than 1% of (AMKR)
Virtus Investment Partners own more than 1% of (CASS)
Virtus Investment Partners own more than 1% of (CSVI)
Virtus Investment Partners own more than 1% of (IGE)
Virtus Investment Partners own more than 1% of (LDR)
Virtus Investment Partners own more than 1% of (LPHI)
Virtus Investment Partners own more than 1% of (MGRC)
Virtus Investment Partners own more than 1% of (NRCI)
Virtus Investment Partners own more than 1% of (DBV)
Virtus Investment Partners own more than 1% of (XLB)
Virtus Investment Partners own more than 1% of (XLP)
Virtus Investment Partners own more than 1% of (XLY)
Virtus Investment Partners own more than 1% of (XLF)
Virtus Investment Partners own more than 1% of (XLI)
Virtus Investment Partners own more than 1% of (XLU)
Virtus Investment Partners own more than 1% of (SUBK)
Virtus Investment Partners own more than 1% of (WDFC)
Virtus Investment Partners own more than 1% of (YDNT)
Virtus Investment Partners own more than 1% of (DRYS)

For Brian Kelly
Accounts managed by Kanundrum Capital own (REE)
Accounts managed by Kanundrum Capital own (GLD)
Accounts managed by Kanundrum Capital own (GDXJ)
Accounts managed by Kanundrum Capital own (SLV)
Accounts managed by Kanundrum Capital own (ANDE)
Accounts managed by Kanundrum Capital own (JJG)
Accounts managed by Kanundrum Capital own (JO)
Accounts managed by Kanundrum Capital own (RS)
Accounts managed by Kanundrum Capital own (UUP)
Accounts managed by Kanundrum Capital own Swiss Francs
Accounts managed by Kanundrum Capital are short the U.K. Pound

For Dan Niles
Niles and Alpha One own (AAPL), (QCOM), (DELL), (PWER)

For Anthony Scaramucci
***No Disclosures***

For Brian Stutland
***No Disclosures***



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