Charted Territories

By Jim Donnelly, Olson Global Markets

In the wake of Goldman Sachs’ recommendation to “short” the S&P 500 Index (SPX) on Thursday, it is worth pointing out that the current technical set-up agrees with that call. After failing to rise above dual “cross” trend line resistance at the 1,363.46 level with overbought conditions present on daily bar charts, a pullback toward a test of key “cross” trend line support now at the 1,265 level appears likely.

Although the equity markets have already weathered the Greek and Egyptian elections, a cut in the Federal Reserve’s forecast of U.S. growth and employment,  Moody’s broad based credit downgrade of 15 global banks, a sharp drop in the Philadelphia Fed Index, the 5^th consecutive monthly drop in business activity in the Euro Zone, a decline in the Chinese manufacturing index (to 48.1 from 48.5 in May) and a drop in commodity prices (whew!), quarter-end “window dressing” portfolio considerations do not favor equity buying in the days just ahead.

Nevertheless, it is also worth pointing out the CBOE S&P 500 Volatility Index (VIX) never did fulfill the objective of a “reverse Head & Shoulders” pattern that would have been consistent with a more severe decline in the equity prices. Instead, the VIX declined along with daily trading volume.  These conditions are not necessarily bearish for equity prices, since the VIX is regarded as a reflection of investor “fear”.

Still, the daily bar chart of the S&P 500 Index does suggest that lower levels are likely to unfold in weeks just ahead. Perhaps expectations that the Supreme Court could overturn President Obama’s proposed health care law, which could in turn spur businesses to initiate hiring activity, have held equity prices relatively steady … notwithstanding Thursday’s 250-point drop in the Dow Jones Industrial Average. Perhaps optimistic expectations for July’s Q2 earnings reports have contributed. That being said, a pullback in stock prices over the near-term is favored by the current technical configuration on daily charts.

http://www.ogmarkets.com

By Jim Donnelly, Olson Global Markets

Although it recovered a bit last week with oversold conditions present on weekly charts, the NYSE Arca Oil & Gas Index (XOI) nevertheless has yet to test key trend line support (that dates back to the low of March 2003) that currently sits at the 1,035 level. Position squaring prior to this weekend’s Greek election may have partly been to blame. Last Friday’s quadruple witching session also may have been a factor. The need to technically “fill a gap” at the 1,151.40 level, which is nearly at hand, may also have contributed to last week’s uptick in the XOI.

Still, a test of the 1,035 level, if it were to occur, would very much emulate similar trading patterns that did develop between June and July of 2010 and between August and October of last year that preceded two separate tests of this same support trend line.

Although near-term upside gains may still occur, there is a reasonably good chance that the XIO will test the 1,035 area before a more vigorous recovery actually takes place.

Interestingly, the correlation of XOI to domestic employment and the equity markets in general is reasonably high. As a result, the XOI may be viewed to some degree as a proxy for the overall economy.

http://www.ogmarkets.com