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Halftime Report: S&P Touches Technical Top

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Around lunchtime on Wednesday the S&P 500 was trading around 870 – a level that some traders, including our own Jeff Macke, believe could be a point of resistance for stocks.

Now traders want to now if bullish sentiment is strong enough for stocks to break higher.

Although it might seem counter-intuitive, GDP numbers are one of the drivers behind the market’s bullish sentiment. Yes, it's true that GDP contracted at a surprisingly sharp 6.1 percent rate in the first quarter, but, as Deutsche economist Joe LaVorgna anticipated on Tuesday’s Fast Money – it was the numbers beneath the surface that mattered most to the Street.

Specifically GDP showed a decline in inventories, which was greeted with enthusiasm. It suggested manufacturers and retailers have reduced the stock of unsold merchandise, which could be key in pulling the economy out of recession.

"What everybody is hanging their hat on is this inventory draw, and the expectation that inventories are that far down that the next thing that's going to happen is that you're going to have to build inventories and we're going to have start manufacturing," explains Paul Nolte of Hinsdale Associates.

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It seems quite likely the S&P 500 will get stuck at the 870 level, says Oppenheimer’s Carter Worth. It takes a lot of momentum to move a stock above a technical top and I think instead of moving higher, it just toys with this level.

GDP had lots of hidden surprises. I was impressed by the consumer spending data in the GDP numbers, explains Fast Money regular Joe Terranova. They suggest resiliency.

The market has reacted to all this news with a big drop in the Vix , adds OptionMonster Jon Najarian. It says to me that worries are evaporating. I think we could press to 33 on the move lower.

And even with some negative news, buyers just kept bidding this market higher, says SMB Capital senior trader Jeff Tomasulo. That speaks volumes.

It's worth recalling that on Monday's Fast Money Jeff Macke said, “Short the S&P against 870. When it gets there sell your stocks!"

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WE DON'T NEED NO STINKIN' STRESS TESTS

Bank stocks had made gains by midday despite reports that “at least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests.”

According to Bloomberg, “while some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity.”

Meanwhile investors are keeping an ear toward Morgan Stanley which is holding it’s annual meeting. CEO John Mack has said he is not likely to pursue a retail bank acquisition, but will focus on its Smith Barney deal, which will give Morgan Stanley a controlling stake in what is by some measures the country's largest brokerage.

I have a long position in Morgan Stanley, reveals Joe Terranova. I like this stock long-term.

Also investors are watching the Bank of America. At the bank's annual meeting on Wednesday, speculation is growing that shareholders may strip Ken Lewis of his post of chairman of the board.

Forget Ken Lewis, I’m keeping an eye on Goldman , says Jeff Tomasulo. If it can stay above $125 I’d get long.

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EARNINGS BETTER THAN EXPECTED

A string of earnings reports is also driving Wednesday’s market action. Time Warner and Qwest Communications both lifted the market after reporting better-than-expected results.

Results from Aetna topped estimates, however investors were spooked by higher than expected cost spikes and sent this stock tumbling.

I’m trading Aetna, reveals Jeff Tomasulo. I got long at $22.

Patterns in the charts suggest to me that many HMO’s including WellPoint and UnitedHealth are carving out a bottom, adds Carter Worth. I think HMO’s should show strength relative to the healthcare sector.

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TAKE YOUR POSITION: STARBUCKS AFTER THE BELL

Starbucks reports earnings for the fiscal second quarter on Wednesday, after the bell.

Baird analyst David Tarantino said in a note to investors that he expects lower utility and milk costs to boost the profits somewhat of all specialty coffee companies, including Starbucks. He sees signs of traffic softening at coffee chains, but said sales could pick up later this year if gas prices stay low and the housing market improves.

Investors will be listening for signs that the slide in U.S. same-store sales has moderated. If the company announces more store closures or layoffs, that could indicate it is still struggling.

If you’re long this stock I’d take at least half off the table, counsels Guy Adami.

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