By Jim Donnelly, Olson Global Markets

Despite overbought conditions that were clearly in place a week ago, the S&P 500 Index (SPX) broke solidly above two (2) forms of trend line resistance at the 1,113 level. This caught many investors and observers (like us) offside, particularly heading into the release of last Friday’s monthly employment data. As a result, the S&P 500 Index now appears to be headed for a test of key “channel top” resistance currently located in the area of 1,185 (and rises over time).

February’s better-than-expected employment report, last week’s announcement of fewer initial jobless claims, a 4.1% jump in same store sales at the chain-store level, a 5.9% rise in GDP, a preliminary estimate of a rise in the Reuters/University of Michigan preliminary index of consumer sentiment for March to 73.8 from 73.6 a month earlier, and a modest 0.2% increase in inventories teamed up to frame a set of economic improvements that were clearly stock-market friendly.

Further, expectations for a series of solid job gains over the next few months are likely to add some froth to the current enthusiasm for equities. The strength and extent of the current bullish momentum, however, will likely be measured as the S&P 500 Index (SPX) approaches key “channel top” resistance in future sessions.

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By Jim Donnelly, Olson Global Markets

Although the S&P 500 Index (SPX) has recently been buoyed by a set of generally better-than-expected earnings reports, a spate of challenging macro economic issues have kept a lid on any kind of meaningful resumption to last year’s equity recovery rally.

On daily bar charts, a test of key trend line resistance in the 1,113 area on the S&P 500 Index has been met with selling and distribution. While trend line resistance rises gradually over time, overbought readings are now clearly present. This suggests that upside price action is likely limited over the near-term. Moreover, the “potential” for an eventual move down to major support, now in the 1,005 -1,015 range, remains a “risk”.

A correction of this size, however, does not necessarily have play out in a straight line. A more gradual, and irregular pattern is likely to emerge instead. This would, in turn, limit the extent of the near-term decline particularly since “mid-channel” support rises over time as well.

Nevertheless, worries over the potential for sovereign debt defaults in Europe, the inability for the U.S. to make measurable progress in addressing long-term financial structural changes, and an uncertain employment picture will likely keep equity prices from advancing with any kind of vigor from current levels. Capital preservation maneuvers, however, may reemerge with an emphasis on stock selection gaining even more importance.

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By Jim Donnelly, Olson Global Markets

One of the curious things about this year’s correction phase of last year’s equity recovery has been the limited downside price action that has occurred thus far. This, of course, is in light of a number or worrisome forecasts that have been made recently. Students of Elliott-wave analysis, for example, are particularly gloomy regarding the direction and downside price potential of equities in general.

Fundamentalists continue to be concerned over the impact that potential commercial real estate write-downs might have on a number of regional banks, conjuring up thoughts of, perhaps, another big government bank “bailout”.

That said, it may be worth taking another look at the Keefe, Bruyette & Woods U.S. Bank Index (BKX) which continues to form what appears to be a bullish reverse Head & Shoulders pattern. True, it has taken a while for this pattern to develop, and it is equally true that the Fed has apparently begun the process of removing monetary stimulus with the largely symbolic raising of the discount rate.

Both of these observations are reasons to give pause to investors. Nevertheless, the prospect of removing “free money” may actually start bankers thinking about doing what bankers are supposed to do: lend money! This is an easy thing to say, especially given the deterioration of credit quality that has no doubt occurred in recent years.

Still, the bullish reverse Head & Shoulders pattern that appears to be forming on the BKX index suggests that a break above key “neckline” resistance at the 48.50 level, if it occurs, could give way to an impressive rise in that index up its lofty “objective” of 79.50. If such a break does occur, the recent corrective phase in equity prices may well come to an end more quickly than most expect.

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By Jim Donnelly, Olson Global Markets

Although commodity prices, including gold, silver, crude oil and the grain complex, have experienced a modest correction lower since the beginning of the New Year, the bias for commodity prices (as measured by the CRB Index) remains bullish when looking at long-term charts.

On October 12, 2009, the CRB Index broke solidly above key “cross” trend line resistance and has remained above it since. Complimenting the commodity rally were continued dollar weakness and a renewed upward trend in the S&P 500 index at that time.

After an intermediate top was reached on the CRB Index at 293.75 on January 6, 2010, a pullback in commodity prices emerged however. Still, with long-term technical studies currently locked onto bullish signals, commodity prices should generally grind higher from current levels even though the current correction to lower levels may not yet be over. Important to note is that key support for the CRB index now sits at 253.50.

If this bullish scenario for commodities is accurate, the upside “potential” for the CRB Index would be for a potential move up to the “backside” of former trend line support which now sits at the lofty level of 350.

Intermediate and long-term charts favor further dollar strength combined with a near-term pullback in equity prices. This suggests that the correction to lower levels in the CRB Index is not yet over. The longer-term outlook nevertheless suggests that the dollar should eventually reverse lower with the S&P 500 Index returning to a bullish trend. That, however, could take a few weeks or possibly months to occur.

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Jim Donnelly, Olson Global Markets

With weekly technical oscillators now positioned bearishly, and with plenty of room to go before oversold readings emerge, it appears that the downside “risk” for the S&P 500 Index (SPX) is for a move to the 990 area. That is where both “mid-channel” and “cross” trend line supports converge on intermediate-term charts.

A decline of that sort would fit in with our expectation for a move up to the 83.70 area on the U.S. dollar index (DXY) as well as a move down to the 138 area on the Philadelphia Gold/Silver Sector Index (XAU).

While it would represent a 33% retracement of the rally from the 666.79 low set on March 6, 2009 to the 1,140.41 high scored on January 14, 2010, it would be a little shy of a Fibonacci 38.2% pullback that would target a test of the 966 area. Nevertheless, oversold conditions would likely on present on weekly charts once a move down to 990 is reached. Similarly, oversold conditions should be present on the Philadelphia Gold/Silver Sector Index (XAU) once it declines to the 138 level. Also in line with this scenario would be the expectation of overbought readings reached on the U.S. Dollar Index (DXY) if the 83.70 level is met.

The fundamental backdrop to these expectations should include: a growing unease over European sovereign debt, highlighted by a weakening Euro; growing concerns over domestic municipal debts woes; a continuation of the “run-to-safety” trade into short-term U.S. treasuries; as well as disparate expectations over job growth leading up to the November elections. That said, corporate earnings along with better-than-expected growth (and revisions to growth) as measured by GDP should keep optimists from turning overly gloomy. Thus, it is very likely that the expected moves of the S&P 500 Index (SPX), the U.S. Dollar Index (DXY) and the Philadelphia Gold/Silver Sector Index (XAU) should each represent a correction within the bigger scheme of things.

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