By Jim Donnelly, Olson Global Markets

When looking at a few market sentiment surveys last week, it is clear that pessimism was acute at the beginning of last week’s trading session. Some had bearish sentiment approaching levels not seen since the March 2009 low. Highlighting that feeling was another net outflow from equity funds and into bond or money market funds. Still, there is a question as to whether market sentiment is currently bearish enough to cause an extension to the equity rally that ignited last Wednesday.

Clearly, the jobless numbers were just a little bit better than had been expected. That said, John A. Challenger, CEO of Challenger, Gray & Christmas, said “layoffs have diminished significantly in the last year” leaving “the economy poised for more job growth as demand grows and the willingness of companies to take risks grows.”

From a technical point-of-view, an interesting situation may be taking place in equity prices that could be linked to this observation. Although bullish “reverse head & shoulders” patterns are generally seen at price extremes, it appears that a modest one may be developing now on the S&P 500 index (SPX). Its “neckline” sits at 1,130 with an “objective” of 1,250. Such a move is not currently expected, particularly in front of this year’s mid-term elections.

Nevertheless, a rally extension could unfold if enough “cash on the sidelines” perceives the current environment to be offering a lot of value in light of a possible turn-around, albeit modest, in the jobless numbers.

Since this particular “reverse head & shoulders” pattern it not forming at a true price extreme, the current technical set-up could, on the other hand, reflect a possible “sucker’s rally” that may merely be part of wide trading range that could prevail for some time to come.

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By Jim Donnelly, Olson Global Markets

Just when it appeared the equity markets might be forced into an extended period of “the summer doldrums” (typical of the season), the S & P 500 Index broke above key downtrend resistance on weekly bar charts forcing investors to take another look.

Thus far, earnings have been, by and large, better than expected. In addition, this week’s economic numbers out of Europe were refreshingly pleasing, highlighted by a survey of German business confidence that posted a sharp rise. Upbeat news on the French service sector and a surprise increase in British GDP added to the reverie.

In addition, some uncertainties that had shrouded the marketplace did get a bit of resolve last week. The SEC’s securities fraud case against Goldman Sachs was settled and the European bank stress test results were viewed as largely benign.

Notions of reduced consumer credit in the U.S., fiscal austerity initiatives in Europe, and continued worries over the soundness of many U.S. State and municipal balance sheets, nevertheless, have not gone away. Because of this, last week’s turn-around in equity prices initially triggered a round of short-covering. Mild mutual fund allocation shifts away from either cash or low yielding or money market funds and into stocks were also noticed.

Although none of the current economic concerns are likely to go away any time soon, the S & P 500 index (SPX) did manage to break above key resistance with oversold conditions still present on the weekly time frame. This technical set-up suggests that further upside gains are likely to emerge over the intermediate term despite the economic gloom that still looms.

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By Jim Donnelly, Olson Global Markets

Technicians are always looking for the birth of a trend, the maturing of a trend, or the end of one. When a series of conflicting chart elements are present however, corrective price action usually results. Such is the case for the S&P 500 Index (SPX) right now. Oversold conditions are currently present, which suggests that buying on weakness is a viable strategy. Bearish technical divergences, like the bearish MACD “non-confirmation” divergence that is now visible on weekly charts, on the other hand, suggests that bullish momentum is still on the wane.

During the past week, the S&P 500 Index (SPX) failed to break above key downtrend resistance at 1,100, but instead reversed quickly lower. Over the next few weeks, oversold conditions could persist with sellers capable of sending the S&P 500 Index (SPX) down to key support now sitting near 1,007. Worse, an eventual test of “channel bottom” support currently at 970 could well occur.

That said, an eventual break above key trend line resistance at 1,100 would likely catch a healthy number of investors off guard, which could fuel an unexpected rally in an otherwise skeptical market environment. Time will tell, but lower price action could prevail for a while until buyers sense that equity prices have been discounted enough.

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By Jim Donnelly, Olson Global Markets

With quarter-end upon us, the question heading into the second half of the year technically is: Can the S&P 500 Index (SPX) hold support, which is now sitting at 1,050? That level represents two forms of trend line support that just happen to converge within an upward sloping trading range.

At the moment, stochastic studies are falling bearishly, but are nearing an oversold condition on weekly charts. RSI is neutral, but MACD oscillators remain bearishly aligned characterized by an on-going divergence. A solid break below 1,050, if it occurs, could lead to a sizable extension down to channel bottom support now resting in the 960 area.

In the forefront, a worrisome jobs picture combined with dismal housing numbers helped dim the fundamental outlook last week. A set of new financial regulations soon to become law also soured the outlook for both the economy and equity prices, particularly since credit will likely become less available to consumers. Some expect to see conditions to worsen further. Others, on the other hand, suggest that amid all these concerns earnings will show improvement for the past quarter. In addition, most observers have increased their expectation for an extended period of unusually low interest rates.

In any event, a focus on the 1,050 area on the S&P 500 Index (SPX) should provide a reasonably good insight as to the direction of equity prices over the next quarter or two.

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By Jim Donnelly, Olson Global Markets

On the heels of May’s disappointing jobs report, equity prices tumbled on Friday resulting in the S&P 500 Index (SPX) closing below key “mid-channel” support on weekly bar charts.

Until Friday’s sobering employment data, equity markets appeared to have the luxury of shaking off Europe’s expanding financial woes, troubling events in the Middle East, serious saber rattling in North Korea, and the on-going oil disaster in the Gulf of Mexico. Worries over a possible housing bubble in China also were also set aside.

An improving U.S. housing market and better than expected retail sales for the year so far had optimists anxious for more evidence of an economic upturn. The details of Friday’s employment picture however, which included a scant increase of only 41,000 new jobs in the private sector and a rise in an alternate measure of unemployment from 16.6% to 17.1%, left even the optimists concerned. In addition, unexpected remarks from a spokesman for Hungary’s new prime minister also soured the session after he described that country’s economy as being in a “grave” situation.

In any event, Friday’s loss of appetite to buy stocks caused the S&P 500 Index to settle at 1,064.88, which was well below key upward sloping “mid-channel” support now seen at 1,079. In the absence of oversold conditions, the “risk” is for a potential extension down to its projected “channel bottom” support now sitting near 939.

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