By Jim Donnelly, Olson Global Markets

Following months of a steady recovery in stock prices, the CBOE Volatility Index (VIX) tested and held two forms of trend line support at the 22.20 level on weekly charts. Oversold conditions are now present on both weekly and longer-term monthly charts, which suggest that a “bottom” in the VIX has likely been reached.

Moreover, since the relationship between the S&P 500 Index and the CBOE Volatility Index (VIX) has been an inverse one, a near-term “top” in the S&P 500 Index may have been reached as well. Thus, weaker equity prices could result if this relationship holds.

Although better-than-expected earnings reports have largely fueled the recovery in the S&P 500 Index, a battle in Congress over healthcare reforms, a call for more troops in Afghanistan and a potential showdown with Iran over its surprise revelation of the development of a second nuclear facility could rattle the equity markets over the intermediate-term.

Weaker than expected readings on both housing and manufacturing also cooled investor enthusiasm for stocks last week. Profit taking in front of this quarter’s end (on Wednesday) as well as the anticipation of Friday’s jobs report could further the tendency to trim positions until clearer reads on both the economy and the geopolitical climate present themselves.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

Amid renewed greenback weakness, the focus of those looking for dollar-induced inflation has been gold. When looking at the largest traded gold ETF (GLD) as a proxy, its price broke above key trend line resistance last week at the $97.50 level and inched slightly above that level to close at $98.67 on Friday.

While overbought conditions are now present on weekly charts, these oscillators are not yet excessively extended. This situation, which often accompanies a key “breakout”, suggests that more upside gains are likely to be scored as momentum buyers continue to buy and support the bullish case for gold.

With that in mind, a “measured move” extension drawn off key “channel bottom” support targets a move up to the $110 area for GLD. That roughly translates to a price of $1,125 for spot gold.

Of course, a solid break below former resistance (now support) at $97.50 on GLD would be a worry and could act as a big “yellow caution flag” for the bullish case.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

Despite the dollar’s recent woes, Gold’s move above $1,000 and a run-to-safety trade into ever diminishing yield bearing U.S. Treasuries, the S&P 500 Index (SPX) pushed slowly above key trend line resistance at the 1,025 level to close the week at 1,044.

This all happened amid growing concerns that the equity markets have gotten too frothy, and are far ahead of the underlying economy. Some have suggested that the SPX is on a “sugar high”. That said, a spate of recent economic data reveals that various real estate markets have improved, the rate of job layoffs has diminished greatly with a number of corporations announcing vastly improved earnings guidance.

Nevertheless, pessimists like to point to the commercial real estate market as one that could cause another financial upheaval. In addition, an unexpected plunge in July’s consumer credit, they suggest, does not bode well for consumption and future retail numbers. Turbulence in municipal finances across the country is another big concern.

Optimists suggest, on the other hand, that the market is ahead of itself …as it always is. In addition, improvements in the finance and technology sectors may soon be joined by the healthcare sector once a more bi-partisan plan gets hammered out by Congress and the President.

Although the break above 1,025 on the S&P 500 Index was accompanied by an overbought condition on weekly charts, a more bullish technical picture can be viewed on long-term monthly charts. (See chart below.) Monthly charts suggest the SPX could and should grind a lot higher before the upswing in equity prices finds major resistance.

From this vantage point, it appears that the SPX may be taking aim at an eventual test of the 1,165 area over the intermediate-term. The 1,165 level represents long-term “cross” trend line resistance (and at times support) that dates back to 1986.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

With a number of fixed income analysts expecting an eventual rise in U.S. Treasury 10-year note yields (due to both a recovery in economic activity and the enormous need for the U.S. Government to raise cash), the direction of interest rate movements continues to confound market participants.

Granted, 10-year yields are now considerably higher than the 2.38% level reached late last year (2008). Part of the explanation for the extraordinary drop to 2.38% is likely due to balance sheet and/or mutual fund considerations at the end of last year’s shaky investment and banking environment. Nevertheless, the direction of 10-year treasury notes has been choppy at best for the current calendar year.

In recent weeks, the 5-month rally in equity markets stalled following a dramatic 50% recovery from the March lows. This resulted in a modest shift back into the fixed income sector. Adding to the move toward treasuries was a growing appetite for safety and/or capital preservation given the seasonal history the month of September. Congress comes back from summer recess, politicians start to propose new ideas, investors get nervous, and the stock market suffers. Conversely, the bond markets generally benefits from these circumstances even though the yield curve tends to steepen.

In any event, U.S. Treasury 10-year note yields are now testing an important level on daily bar charts near 3.25%. Trend line support from December’s 2.38% low as well as key “cross” trend line support dating back to the beginning of 2008 both converge at 3.25% with deeply oversold conditions now present on the daily time frame. If this level proves to be a near-term low, it would be a fair assumption to expect equity markets to rise with allocations increasing for equities and declining for treasuries.

If U.S.10-year notes yields were to drop solidly below 3.25% however, a more pronounced retreat to lower equity prices will likely unfold as well.

http://www.ogmarkets.com