Charted Territories

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.

http://www.ogmarkets.com

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.

http://www.ogmarkets.com