20th April- will the S&P fail at the highs?
22 April 2013
TECHNICALS:
WEEKLY CHART
The market is testing the highs made in 2000 and 2007.
A break through would underpin the market for another bull leg.
A failure would set up a massively influential third failure.
When would a pull back be considered as more than a pause?
The level 1474 looks very important because of the current coincidence of a horizontal and a diagonal support….
DAILY CHART
The day chart has a level – 1522 - that a breach of which will suggest a test of that lower level.
So short-term we are watching 1522. That has to break before the bull trend should be considered under threat.
Only a break of 1474 would suggest that a major pull-back was in prospect…
FUNDAMENTALS:
Since the last major correction in the May/June period of last year, the S&P has enjoyed a strong bull run that has taken the market back to the all-time-highs. The move has been fuelled by the Fed rolling out successive rounds of QE designed to fuel a sometimes-faltering economic recovery.
That policy, until a few weeks ago seemed to have secured the Fed’s objective of seeding a self-sustaining recovery with the labour market showing clear signs of healing itself. But suddenly data turned soft and after several weeks of disappointing data, traders are again questioning the economy’s staying power.
If the current weakness develops into a new trend, the Fed will be forced to reconsider its assessment of the economy. Only a couple of weeks ago Fed officials were beginning to line up to talk about the possibility of either reducing or ending early their current QE3 policy, that now looks inappropriate.
But although the S&P has paused, will it reverse or is the bull trend set so strong the market will eventually power on?
Even if the economy was not going through yet another difficult patch, it would be perfectly reasonable for the market to pause at the previous highs, which initially could be seen as a natural profit-taking opportunity.
But because of the duration of the financial crisis/recession and the stuttering nature of the recovery, the previous highs are something of a psychological barrier that might take several attempts to overcome, even if the economy is still in full recovery mode.
So given the current weakness of data what will the market do? Will it correct and fail as it has done previously or will the Fed recant its recent musing about ending QE3 and re-assure traders/investors that the policy remains in place.
With an FOMC meeting looming we shall soon have an answer to that question, but we think the Fed will let it be known that until the economic recovery is clearly self-sustaining and unemployment is at the level they have previously stated as their target, they will stick with the QE3 policy as previously stated.
Moreover, with the Congress and President still no closer to dealing with the consequences of the “sequestration”, which is largely responsible for the current bout of economic weakness the Fed is all that stands between economic recovery and a slide back towards recession.
For us that means the current price action in the S&P is probably only a pause. If the Fed lets it be known it will stay the course with its monetary easing policy we judge traders will refocus and buy into an economic recovery and take this market through the highs.
Add in the new aggressive policy stance now taken by the Japanese authorities and the worlds No1 and No3 economies have central banks that are serious about getting their economies moving.
The Nikkei has recently shown the way and has held up very well over recent weeks while other leading markets have paused, we judge the S&P can follow suit and advise looking for fresh buying opportunities into what we see as a long bull run.
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25th Apr - Gold Finally Breaks Long Term 23.6% Support 
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12th April - The Nikkei awakes