Charted Territories

By Jim Donnelly, Olson Global Markets

As the sovereign debt crisis intensifies in Europe, investors continue to shed equity holdings opting instead for fixed income investments. That has helped push U.S. Treasury yields to ever lower levels. While this trend has already forced a number of extreme technical readings to emerge, the current trend does not appear to be over just yet. The S&P 500 Index itself could be headed for a test of key trend line support near the 1,074 level, with U.S. Treasury note yields targeting a move toward long-term “channel bottom” support now seen at the 1.50% area.

No doubt the recently announced Fed policy called “operation twist” has had a hand in the most recent push toward lower long-term yields. This trend, however, has been in place since the S&L crisis of the early 1990’s. Capital “preservationists” have also stayed the course despite years of warnings from various market observers.

Worries over the “threat of cascading default(s), bank runs and catastrophic risk”, as U.S. Treasury Secretary Timothy F. Geithner put it, have nevertheless acted to panic investors as much as to heighten the sense of urgency for government policy makers in Europe to quickly back the European Central Bank to prevent further economic turmoil.

In any event, a move toward the 1.50% level for U.S. Treasury 10-year notes appears to be “in the cards”.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

Since the “Tech Crash” of 2000, the equity markets have offered up a number of price extremes. There was the “Tech Crash” itself, followed by the impact of 9/11. Those shocks resulted in an “easy’ monetary policy the led to a bottoming process that developed between 2002 and 2003. In turn, those “easy” money conditions fostered a resurgence in home building and consumption. Excess home-related lending, coupled with lax credit assessments and exaggerated appraisals ushered in the “housing crisis”, as well as a monumental “debt crisis”. That triggered a massive sell-off in equity prices of all sorts, a brand new round “easy” money conditions, as well as bailouts and restructurings of a number of large banks and companies like AIG and GM.

Following the March 2009 low extreme, another basing process began which ignited a revival of stock prices despite further housing market struggles. That being said, a new “topping” process developed earlier this year which resulted in an irksome correction highlighted by worries over financial conditions in the Euro Zone, a taste of inflation at gas pumps and grocery stores and sluggish employment conditions.

Technically, the extremes of 1999-2000, 2002-2003, 2007 and 2008-2009 were each accompanied by either bearish “Head & Shoulders” patterns, or bullish “Reverse Head & Shoulders” patterns at relative price extremes. Interestingly, while not at a extreme relative to where prices have been over the past dozen years or so, the reversal pattern that developed earlier this year also came in the form of a bearish “Head & Shoulders” pattern that played out to the downside and hit its “objective.

Since then, equity prices as evidenced by the S&P 500 index (SPX) have been in a “tug-of-war” between “bulls” and “bears”, with a generally better-than-expected set of earnings reports in the background. This past week’s price action, in fact, caused weekly stochastic studies to turn up and trigger a “buy signal” with the Relative Strength Index (RSI) rising bullishly.

These conditions suggest that a retest of former “neckline” support (now resistance) at 1,275 on the S&P 500 (SPX) may be “in the cards” over the coming weeks or months. It is important to note, however, that since the “Tech Crash”, none on the prior “neckline” support or resistance levels has been exceeded or broken within five (5) years of their respective developments. Nevertheless, the current price activity favors a recovery up to the 1,275 area as investors climb the now ubiquitous “wall of worry”. A break above it would catch a number of investors “off sides” which, in turn, could touch off an unexpected rally. The failure to do so, however, would underscore bearish concerns of a darker nature.

http://www.ogmarkets.com/