S&P 500 Index Appears Aimed For A Test Of The 1,400 Area

By Jim Donnelly, Olson Global Markets

With a number of better-than-expected Q1 earnings results, the continuation of ultra low interest rates, and the dollar index (DXY) still heading lower, the S&P 500 Index (SPX) appears to be headed for an eventual test of the 1,400 area, and new yearly highs. This, of course, appears to be happening amid a battle over the national budget deficit, continued turmoil in the Middle East, rising commodity prices and an unfunded pension liability crisis looming across the nation at the state and municipal level. Increased speculation over possible sovereign debt restructuring in Europe is also a dark cloud on the horizon.

From a technical point-of-view, however, Elliot-wave analysis currently suggests that the S&P 500 Index has already completed a 4th-wave correction and is now in the midst of a 5th-wave move higher targeting 1,396. Coincidentally, three forms of trend line resistance appear to converge just below the 1,400 level on weekly bar charts as well.

While a plus for equity prices in the short-run, this technical set-up also suggests that a sizeable correction to the downside should emerge after the 1,400 area is reached on the S&P 500. At the very least, a minimum 38% retracement of the projected 1,396 high and the July 2010 1,011 low targets a potential pullback to the 1,248 area. A more realistic 50% correction would target a move down toward 1,203. While these expectations may be getting a little ahead of actual market movements, the current set-up remains positive over the near-term. It is the “intermediate-term” that is the real worry.

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