Charted Territories

By Jim Donnelly, Olson Global Markets

With no “debt ceiling” agreement achieved last week (or by this writing), and with the August 2^nd deadline quickly approaching, equity investors became increasingly worried last week. By the close of Friday’s session, growing frustration caused investors to push the CBOE S&P 500 Volatility Index (VIX) above key trend line resistance at 23.65. A weaker-than-expected Q2 GDP report and the threat of a rate downgrade to U.S. Government bonds helped increase the gloom. In Europe, a warning by Moody’s that it might soon lower the credit rating on Spain’s sovereign debt as well as on four of Spain’s key lenders was another big negative.

That being said, it is important to note that each of the last two (2) times the VIX broke above similar types of resistance (on 9/15/08 and on 5/4/2010), the S&P 500 Index declined by 44.1% (from 1192.70 to 666.79) and by 13.9% (from 1,173.60 to 1,010.91) respectively. Interestingly, the jump in the VIX after 9/15/08 (from 30.25 to its peak at 89.53) represented a 195.3% move in the volatility index itself, while the VIX’s jump beginning on 5/4/2010 ran from 24.27 to 48.20 or less pronounced 98.6% rise.

Although a debt ceiling agreement of some sort might soon emerge with a “relief rally” erupting shortly thereafter, equity investors will still have to face an apparent weakening of the U.S. economy, if not a more disturbing global slowdown.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

As investors wait patiently to see if a deal can be struck to raise the national debt ceiling and avert a government shut down, oil prices have edged higher. In like, but inverse fashion, the U.S. dollar index (DXY) has slipped to lower levels despite a myriad of debt woes currently being addressed in Europe. The result of these two predicaments has been for the expectation of an expansion of fiat currencies, which in turn could ramp up inflation fears.

In the energy patch, the Philadelphia Oil Service Sector Index (OSX) has already tested and rebounded off key trend line support with most technical oscillators positioned bullishly on weekly charts. While higher levels are expected over the coming weeks, a close above primary downtrend resistance now at the 291 level would be considered a bullish “breakout” that could lead to much higher levels.

In recent weeks, a number of fundamental observers have warned that energy prices are positioned to move much higher over the next 12-to-18 months. Moreover, they suggest consumers may face “sticker shock” at fill-up stations in the not-to-distant future.

Sympathetic to that notion is the current technical set-up of the OSX index.

http://www.ogmarkets.com/