Charted Territories

By Jim Donnelly, Olson Global Markets

With overbought conditions present on long-term charts, the Dow Jones Industrial Average appears to be aimed for a test of two key “cross” trend lines that combined represent important resistance at the 12,800 level. If a test of this level were to occur, it would represent a 97.8% gain from the March 6, 2009 low of 6,470.

The real question is whether the 12,800 area will halt the upward move of the DJIA that has thus far shaken off a host of worrisome news that include: wide spread turbulence in the Middle East; a major jolt to Japan’s economy; a steady rise in commodity prices; a residential real estate market that has yet to stop sliding lower in both sales and price; and the expectation that state and municipal balanced budget efforts could result in job loses that, in turn, could offset a nascent recovery in the employment data.

From a technical point-of-view, equity prices appear to be stretched without experiencing a serious correction since last August. While that might be true, quarter-end “window dressing” may be contributing to a shift away from U.S. treasury notes and bonds and into stocks, particularly with the Fed maintaining a zero interest rate policy. A slide lower in the U.S dollar index, in theory, should favor the export picture. But, the importation of higher costing oil, while helping the price of stocks in the energy sector, could at some point cross the “tipping point” that forces U.S. consumers to close their pocketbooks until the job picture and wages begin to show solid gains.

There is no doubt that if a trend in job gains were to begin, the overall economy would shake off inflation expectations and the slumping housing market. As a result, March’s employment report due out at the end of the week should be the focus of investors near-term. Keeping an eye on the 12,800 area on the DJIA, however, should be the focus of investors over the intermediate-term.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

With plenty of things to worry about both globally and domestically, the S&P 500 Index remains in a “tug-of-war” between buyers and sellers. On daily bar charts, the S&P 500 Index (SPX) has already broken below first key support at 1,315 and has staged a relatively contained correction. Without having yet tested key trend line support (currently at the 1,235 level), oversold conditions have developed on the daily time frame. This set-up suggests that a possible move back up toward trend line resistance now at 1,335 could unfold first.

Still, it is trend line support at 1,235 that should be the key test. That level, which sits only 109 points below the 1,344 the post-Lehman Brothers high set on February 18^th, represents a very modest 8.1% correction by itself. To many, a correction of this size almost seems benign, particularly in light of a number of unknowns that have resulted from the recent jolt to the manufacturing sector in Japan, let alone a set of on-going conflicts in the middle-east.

It is worth pointing out that the technical picture on the S&P 500 Index is much murkier when looking at the price activity on the intermediate-term time frame.  Technical “sell signals” have been triggered on weekly charts with overbought conditions still present. This is a concern that should be heeded if the 1,235 level were to give way to sellers. Such a breakdown could lead to a possible test of “cross” trend line support at 1,050, which would represent at a more troubling 22% retreat from the February high.

http://www.ogmarkets.com/