Charted Territories

By Jim Donnelly, Olson Global Markets

On the eve of the crucial mid-term elections, the Fed’s Open Market Committee meeting and the release of October’s jobs report, the S&P 500 Index (SPX) is slowly approaching a test of a key resistance area located at 1,260. That level represents two forms of “cross” trend line resistance as well the “objective” of a bullish reverse Head & Shoulders pattern that developed earlier this year between April and September.

Although the 1,260 level also represents a nearly 6.7% advance from Friday’s closing level of 1,183.26, a sharp post-election spurt higher may provide an opportunity to “lock in” profits before year’s end. In addition, without knowing what next year’s capital gains tax rates will be exactly, it might be a way to offset an unexpected policy risk as well.

Nevertheless, a move up to the 1,260 area, if it does occur, would translate into a 13% gain since the beginning of the year. That is more the double the current year-to-date gain of 6.1%. Overbought conditions are now present which suggest upside gains going forward may face a “head wind”.

In any event, the upcoming trading week should prove to be one of the most important of the year with some measure of uncertainty removed, Federal Reserve and election-wise. That, in turn, should help investors and decision makers gain more clarity.

http://www.ogmarkets.com

By Jim Donnelly, Olson Global Markets

Despite overbought conditions on the weekly time frame, commodity prices as measured by Reuters/Jefferies CRB Total Return Index (CRB) have broken solidly above key trend line resistance at the 281 level and are in position to extend a lot higher. Clearly, a near zero percent Fed Funds interest rate policy, along with the expectation of another round of quantitative easing have played a big role in this breakout. Moreover, continued weakness in the U.S. Dollar Index (DXY) has been a factor as well.

Although final demand inflation has not actually occurred, due to high unemployment levels and modest hourly wage gains, both commodity prices and asset values have been rising for months. Equity prices, typified by the S&P 500 Index, have risen nearly 77-1/2% from their March 6, 2009 low. Similarly, the CRB has risen nearly 48-1/2% from its March 2, 2009 low. While these are impressive gains, higher levels appear to be in the cards even if a period of post-election consolidation ensues next week.

Part of the reason for further inflation and asset price gains is due to the Fed’s relatively aggressive money creation policy. Although austerity policies have been adopted by a number of European governments, the current US administration has not. This position puts the burden of economic stimulus on the shoulders of the Federal Reserve. As a result, equity prices should continue to grind higher with the profit picture improving. Over the foreseeable future, commodity prices should also find their way to higher levels since the dollar will likely follow the path of least resistance lower.

http://www.ogmarkets.com