Charted Territories

By Jim Donnelly, Olson Global Markets

With market psychology maintaining a bullish bias, the S&P 500 Index (SPX) closed Friday’s session on an upswing, testing key trend line resistance at the 1,503 level …with overbought conditions present on weekly charts.

Although a technical set up of this kind often results in a correction to the downside, momentum buyers have clearly dominated trading in recent weeks with gains being posted during 11 of the past 12 trading sessions on the S&P 500 Index. Moreover, the typical daily trading pattern over the past few weeks has started out equity prices opening on the weak side, only to be eclipsed by stronger buying activity later in the session. And while there are many fiscal and political worries are still present globally, investors have largely ignored the “bad news” and have instead focused on the “good news”, particularly through the current earnings season.

The prospect of a global economic recovery has no doubt forced “shorts” to cover, with investors warming up to the notion that things might be getting better economically. The latest evidence of this was a sharp decline in weekly jobless claims, which portend a set of upwardly revised forecasts for the monthly jobs report due out on Friday next. An expansion of the money supply numbers along with a general improvement in the housing sector has also helped to renew optimism.

As a result, investors might well lift the S&P 500 index above key resistance at the 1,503 level soon. A solid move above last Friday’s close, however, could result in an “exhaustion extension” that “Elliott wavers” suggest is indicative of a bullish 5^th-wave “leg”. Nevertheless, equity buyers appear to be in “control”, and could stay that way until perhaps a test of long-term trend line resistance that currently sits at 1,595.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

As equity prices edge higher and climb the infamous “wall of worry”, the CBOE S&P 500 Volatility Index (VIX) has broken below key trend line support at 13.15 and now threatens to move lower still. Although deeply oversold conditions are now present on weekly charts, the next major support level for the VIX sits at 9.35, a level not seen since December 15, 2006.

If a move down to the 9.35 area were to play out, equity prices would likely hold steady, or more likely rise until then. That being said, the VIX (which is often referred to as the “fear index”) currently offers protection from an unexpected “shock” in the equity markets at a reasonable price. Nevertheless, “spot” VIX suggests that a “shock” to the market is not likely to occur over the next few weeks or so. Worries over a possible battle concerning the debt ceiling, or the sequestration, or the continuing resolution already appear to be priced in. Violence in various locations in the “Middle East” or in West Africa also seems to be priced in as well.

Nevertheless, a more intense currency “war” appears to have launched by the new Japanese government in recent months that could put additional economic pressures on the Euro Zone and the U.S. And although it should take time for a new round of currency debasement to become a bigger factor for the equity markets to assess, an upward path in equity prices will likely continue for a little longer. At some point, however, a bit of inexpensive volatility protection may become more valuable as future economic events unfold.

http://www.ogmarkets.com/