S&P 500 Breaks Above Key Resistance; Takes Aim At Another

By Jim Donnelly, Olson Global Markets

Despite overbought conditions on weekly charts, a series of better-than-expected earnings announcements combined with a number of economic reports suggesting that the economic downturn is moderating helped lift the S&P 500 Index above key trend line resistance that stood at 959 last Thursday.

The knock on this quarter’s earnings numbers, however, is that in part they may have been achieved due to staff reductions in large, medium and small sized businesses across the board. Bears will argue that rising unemployment levels and reduced credit availability will limit domestic consumption and thus the upside for equities in the foreseeable future.

On the other hand, more bullish observers suggest that inventory reductions, rapid destocking of product lines combined with low interest rates and a weak dollar should help businesses increase margins and therefore earnings in the quarters just ahead.

From a technical point-of view, the S&P 500 Index is clearly in an overbought condition. That said, steady buying could keep equity prices edging higher despite the current overbought condition. In addition, Thursday’s break above resistance at 959 suggests that an extension up to the 1075 area, where another trend line resistance sits, may well occur before upside momentum subsides.

If it does, another battle between bulls and bears will likely occur near 1075. At that point, a reassessment of economic conditions might suggest that the market is ahead of itself, particularly in light of the fragile environment that global economies find themselves in.

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