Archive for February, 2010

S&P 500 Index Fails At Key Trend Line Resistance

Posted in The S&P 500 Index (SPX) on February 28th, 2010 by admin – Be the first to comment

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.


Don’t Give Up On The Banks Just Yet

Posted in Keefe Bruyette & Woods U.S. Bank Index (BKX) on February 21st, 2010 by admin – Be the first to comment

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.