Archive for February, 2011

A Bigger Correction Coming On The S&P 500 Index?

Posted in The S&P 500 Index (SPX) on February 28th, 2011 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

With a backdrop of continued violence in Libya, a jump in oil and gasoline prices, the spread of U.S. domestic municipal budget woes, a downward revision to Q4 2010 GDP, and a possible government shutdown by the end of this week, the S&P 500 Index (SPX) fell by a modest 23 points (or 1.7%) during the past week. In many ways, last week’s modest setback was a reflection of the market’s overall strength …a lot of disturbing news with only a mild setback resulting.

Still, overbought conditions are glaringly present on weekly charts with key trend line resistance sitting overhead near 1,370. Although, the S&P 500 index did hold above key trend line support at 1,294 last week, a break below it in the coming week would likely trigger “follow-through” selling, if it occurs. If it does, it’s worth pointing out that the initial “risk” is for a move down to trend line support now sitting near 1,220.

Even if a correction from the recent 1,344 high down to 1,220 were to occur, by itself it would represent only a modest 9.2% setback on the heels of a “doubling” in the S&P 500 index from the depths of its March 2009 low.

A failure to hold at or above the 1,220 level would be yet another concern, but it would be getting ahead of ourselves to think about it at the moment as we search for points of interest on weekly charts. Suffice to say, further corrective price action from Friday’s close shouldn’t come as a surprise to anyone …but the absence of it would.

S&P 500 Index Approaching Crucial Resistance Level

Posted in The S&P 500 Index (SPX) on February 22nd, 2011 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

As the market relentlessly inches higher each day, it is worth pointing out that the S&P 500 index (SPX) is ploddingly approaching a test of crucial resistance now at the 1,370 level when looking at long-term (monthly) charts. Overbought conditions are, of course, clearly present on almost every time frame which makes an extension above 1,370 dubious at this point-in-time.

Although relative calmness has ensconced the equity marketplace recently, turmoil in the Middle East, a serous rise in the price of Brent oil, cotton, meat and grain prices may soon take their toll on investor sentiment. As a result, the time to consider paring back on long positions or buying relatively cheap option protection appears to be nearing.

In the weeks just ahead, a budget showdown in Congress could cause the government to shutdown, which Federal Reserve Chairman Ben Bernanke has warned could have “catastrophic” consequences to U.S. markets. This is happening when, in the short-run, the economic recovery appears to be fragile with the U.S. still technically at war. These points will likely become the Democratic stance regarding the “debt ceiling”. On the other side of the aisle, however, it will likely be the amount of budget cutting (in order to address longer-term fiscal stability) that will be the issue. These viewpoints should define the “line-in-the-sand” of the political battle that is looming.

Moreover, rising gasoline and food prices over the next few months could become a drag on consumer sentiment just at a time when a series of “rearview mirror” sales reports have painted a better-than-expected picture of things that have recently buoyed the retail sector.

Worries over state and municipal budget woes could also become a daily TV news event visually. Depending on how these battles are waged, a decline in government employment, a cut in state and local services, or rises in various state and local taxes …or all of the above … could result. This, of course, will tend to reduce disposable spending, and/or raise concerns over job security once again.

As a result, the budget showdown in Congress, rising food & energy prices or an increase in interest rates could cause the equity markets to pause and take a more sober view of the future. This, in turn, could usher in a correction phase in order to digest present conditions.