Charted Territories

By Jim Donnelly, Olson Global Markets

The accompanying chart of the S&P 500 Index (SPX) clearly has a lot of lines and curves on it …and it is messy. Up to the past week or so, a number of either bullish reverse Head & Shoulders patterns or bearish Head & Shoulders patterns have cropped up over the past 12 or 13 years that have defined the direction of the S&P 500 Index. Importantly, that series of patterns has done a reasonably good job of presaging equity price activity.

The problem, however, is that the “neckline” of a bearish Head & Shoulders pattern, which albeit already hit its downside target, has now been broken above at the 1,295 level. On the face of it, such a break would have to be viewed as a very positive event …particularly with the Fed’s latest missive suggesting that a 0% fed funds policy will be in place throughout at least late 2014; and with ECB offering unlimited three-year loans to the region’s banks in an effort to boost demand for higher-yielding assets.

On the other hand, the enormity of ever growing global debt levels is a huge issue for investors as well as policy makers, with many policy makers not in agreement over the issuance of a lot more debt. This is evidenced by the glaring dysfunction of the U.S. Congress, as well as the number and duration of rolling debt crises unfolding in Europe. And despite all of the monetary engineering done to date, a robust recovery (or even inflation) has not really taken hold. Moreover, some have viewed the Fed’s latest pronouncement to extend the 0% fed funds policy as a reflection that our central bank’s true concern is that “deflation”, not inflation, is the dominating worry.

Although an elevated level of consumer confidence, with nascent signs of housing and automobile buying activity is a plus, structural economic problems will likely mute any global growth prospects for years to come. Age related demographic forces are another set of problems yet to be faced.

As a result, the messy S&P 500 chart referred to before presents a few possible outcomes. If the S&P 500 Index (SPX) can break solidly above primary downtrend resistance drawn off the highs dating back to 2007 (currently coming at 1,335 with overbought conditions present on weekly charts), a move up to toward trend line resistance at 1,415 is possible.

A failure to decisively break above 1,335, however, leaves open the possibility that a very large and very bearish Head & Shoulders pattern targeting an eventual move down to the 780-800 area could now be developing instead.

Comments from Caterpillar CEO Douglas Oberhelman, foreseeing global growth in the 3.3% range lean toward a much more bullish and upbeat outlook for the current year. Hopefully, he will be right suggesting the market is now climbing the proverbial “wall of worry”. The reasons to cause worry, however, seem to be ubiquitous to many investors.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

Despite disappointing quarterly reports from the likes of Google, American Express and Capital One, better-than-expected results from IBM, Microsoft and Intel helped power the Dow Jones Industrial to a 298.40 point gain or a 2.4% jump for the week. Adding to the upbeat mood was an unexpectedly sharp drop of 50,000 in initial jobless claims, the biggest drop seen in six years. A pullback in energy prices, particularly natural gas was also seen as a plus for consumers.

Although negotiations between the government of Greece and experts representing the private banks and investors (designed to reduce the Greek debt burden) remain unresolved, stronger-than-expected demand for short-term Spanish and Italian sovereign debt issues last week were clearly welcomed by investors. That was evidenced by a modest rebound in the Euro, as well as a decline in the U.S. Dollar Index (DXY), which it turn helped to lift U.S. equity prices at the expense of pushing domestic bond prices lower.

In any event, the Dow Jones Industrial Average is now approaching a test of an important technical zone that now sits between 13,650 and 13,750. With overbought conditions at hand on weekly charts, a move above this area does not appear to be a good bet over the near-term. On the contrary, it might prove to be a key sticking point with a number of potentially upsetting political events currently on the horizon. The resumption of the battle over the payroll tax relief extension plan, a more muddled Republican Primary picture heading into Florida, combined with worries over this week’s longer-dated German and Dutch debt auctions absent a resolve to the Greek debt crisis could team up to cause investors to take a pause.

http://www.ogmarkets.com/