By Greg Peel

The Dow rose 330 points or 3.0% while the S&P jumped 3.4% to 1194 and the Nasdaq soared 3.5%.

Wow. After two years of indecision, infighting, disagreement and dithering, of multiple plans, of band-aids, and of denial, all Europe really needed after all was was for the chancellor of Germany and the president of France to come out and declare "we have a coordinated plan". Never mind the caveat of "but we're not going to tell you what it is yet".

As noted in yesterday's Monday report, this was the news on the weekend. Angela Merkel and Nicholas Sarkozy met in Berlin on Sunday and supposedly agreed on a Final Solution to save Europe, details of which will be revealed in time for the G20 meeting at the beginning of next month. This had the Australian market excited yesterday, but that was nothing compared to the 2% rally in London and France overnight and the 3% rally in Germany, along with the 3.4% rally on Wall Street last night.

My assumption would be that Merkozy met and realistically just agreed on one thing ? that the bickering must end now and and Europe must be seen by the world to be on the same page with a plan to resolve its debt issues. The important factor is for the world to know Europe is now coordinating. As for the details, well we've got a month to come up with those.

If this is what will actually eventuate, then it is good news. If the Merkozy plan is revealed and immediately met with resistance from one of the other seventeen eurozone members, or the EU, or the ECB or even IMF, then we'll be back where we were. All we can do is hope that this time Merkozy is for real. And in the meantime, cover our shorts.

Short-covering, and little much else, has been driving this extraordinary week of rallies. Sure there will have been some optimistic buying, as well there should be, but we have to be a bit careful here in the shorter term. Last night in the US, for example, was the Columbus Day bank holiday and volumes on the NYSE were very light. The Dow merely opened about 250 points higher and stayed there for most of the day before kicking up on thin air at the death.

If we look at a chart of the S&P 500 index over the last three months, we can see the relevant picture. After plunging through July and into August all we've done since is bounce around in a range marked by fleeting optimism on the top side and Omigod on the bottom. The lines I have drawn here loosely define that range and we note a couple of attempts to break out either way.