By Jim Donnelly, Olson Global Markets

It is the last week of the year and many trading books have been closed in order to avoid any negative surprises and to “lock in” gains. Nevertheless, the DJIA edged closer and closer to a test of the technically important trend line resistance level of 10,660. This level represents the “underside” of former trend line support drawn off the lows of December 1995, October 2002 and March 2003 which was decisively broken below in October 2008 following the failure of Lehman Brothers.

Since the depths of March 2009, an almost uninterrupted reversal higher has occurred, which has caused the DJIA to currently enter into an overbought condition on weekly charts. Normally, this type of set-up favors an initial rejection when trend line resistance is first tested. In addition, a consolidation phase of perhaps 38% to 50% often ensues.

Over the past decade, however, the equity markets have been fraught with excessive price activity, which is why the 10,660 level takes on additional importance. A solid rejection there would suggest that a typical correction phase may emerge. A solid break/close above it, however, would confound bears, as well as moderate bulls, which could result in a fresh round of investor demand.

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By Jim Donnelly, Olson Global Markets

Evidence of improved expectations for a more stable economic recovery may be seen by viewing a chart of the Philadelphia Semiconductor Index (SOXX). Following a prolonged decline between the all-time high of 1999 through 2008, the SOXX Index has since turned higher from deeply oversold conditions on monthly charts. That however, is typical following such a massive selloff.

What is better news for the semiconductor area is the fact that it the SOXX Index broke above two (2) key resistance lines that both converged at the 310 level. Each of those former resistance levels had some importance. One was a trend line drawn off the all-time high set in March 2000 at 1,362 and the July 2007 intermediate high of 548. The other was a “cross” trend line drawn off a series of lows between 1995 and 2002 as well as the high print scored in July 2009.

Looking forward, the next key trend line resistance area to focus on now sits at 460. With many long-term (monthly) technical studies still locked onto “buy” signals, there appears to be a reasonable chance that a move up to the 460 level may occur over the intermediate-term. If it does, it would be one more sign that the equity marketplace and the economic are getting healthier.

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By Jim Donnelly, Olson Global Markets

With position-squaring, tax-loss selling and year-end considerations at hand, it is worth noting that the S&P 500 Index is now hovering just below major trend line resistance that comes in two forms despite a noticeable drop in trading volume.

A trend line drawn off the 10/11/2007 all-time high of 1,576 and the 5/20/2008 intermediate high of 1,413 currently comes in at the 1,120 level. So does a “cross” trend line drawn of a series of former highs and lows dating back to 7/29/2005.

Although technical studies are clearly in an overbought condition on the weekly time frame, they remain locked onto “buy” signals which allows for the possibility of a “breakout” to occur. Still, the market has run a long way from the depths of March as the economy, though very much challenged, continues to show signs of improvement.

In a sense, it’s “game time” for the S&P 500 Index to demonstrate whether it has the strength to overcome this key resistance area. Hopefully, there will be enough participants that will show up to the “game” to find out.

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By Jim Donnelly, Olson Global Markets

Although six additional bank failures were recorded on Friday December 4th, a chart of the Keefe, Bruyette & Woods U.S. Bank Index (BKX) suggests that a bullish reverse Head & Shoulders pattern is now developing. Thursday’s announcement by the Bank of America that it plans to repay its $45B TARP loan (by raising $19B in a preferred sale as well as a agreeing to raise $4B in common equity through an asset sale) helped boost confidence that banks may be in much better shape than had previously been thought.

Increasing evidence that the economic downturn may be ebbing also added to the brightening picture for banks. Although a bottoming phase may take time to develop, particularly considering the fragility of the recovery, confidence in banks appears to be growing. With that in mind, the KBW Bank Index will have to break above key neckline resistance at 48.50 in order to eventually take aim at this pattern’s lofty objective of 79.50.

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