Home > Uncategorized > 2013/01/10: Technicals and Might US Equities Attempt a Jailbreak?

2013/01/10: Technicals and Might US Equities Attempt a Jailbreak?

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A fresh set of Technical Projections and Select Comments are already available via the link in the right hand column, current through Wednesday’s US Close. And yet, we may need to update those again very soon due to the influence of some upbeat corporate guidance (a real change from last quarter) and the ‘lack of crisis’ guidance from President Draghi at today’s ECB press conference.  

The old saying on why the press is so fixated on sensationalist content is that you can’t sell papers with the headline “The House Is NOT Burning.” Maybe not. But you can sell equity investors the idea of a lack of a crisis is grounds for expecting better earnings, or alternatively earnings multiple expansion enhancing the price of equities. The latter has been one of the main arguments of the bulls for some time. They have asserted that crisis fears have multiples unreasonably low.

And even with our reservations about the way forward after this month’s positive influences, that does make a difference. With S&P 500 companies estimated to earn approximately $100/share (subject to revision), each one point change in the P/E multiple is a difference of $100 in the index… no small matter.

And those better sentiments on Europe and the reversal into somewhat improved corporate guidance mean an improvement in the P/E multiple to 15 might be reasonable; at least unless and until those 2013 headwinds begin to bite. See our Tuesday Cal-Perspective and US December strength to continue? post for much more on what still might go wrong into next month. Yet as we explicitly noted there, this is only going to become a factor later this month into February.

In the meantime, the question is whether the S&P 500 future might be ready to reflect some folk’s full annual 2013 target right away early in the year? Well, when some sort of aggressive expectation such as that rears its ugly (or beautiful depending on your trend opinion) head, it is best to ask what the market is telling us about the ability to advance straight to the implied target in the low 1,500 area. And in that regard, the current technical projections are quite enlightening.

 

SPHdaily-130110 

While there are other factors we will be adding (in the market comments below) to the confluence of factors that make the current price area critical, one or two things are the obvious from the simple chart picture.

 

Based on today’s Close already being at the top end of the important 1,465-67 previous congestion range, it is not likely the market can stand still here for very long. That is intensified by being at the top of the overall up channel (CH2) that happens to be just below the important September 14th Quantitative Easing surge 1,474.50 lead contract rally high. Any sustained push above the September high also being UP Acceleration out of the current intermediate term channel would foment a further aggressive extension of the overall rally. There are other aspects we explore below on historic congestion and weekly oscillators that reinforce the basic indication we are seeing here.

Suffice to say for now that any sustained extension on any push above the 1,475 area or a failure back below 1,460 will be in important indication either way. Upside Acceleration or the countervailing sense of exhaustion from important resistance is likely in the works for either the end of this week or early next.

Fundamental factors may need to sort themselves out across the course of this month into early February. But the technical picture is crystallized in many ways on the approach to that major September 14th Quantitative Easing surge 1,474.50 high, with good reason why any violation points to a likely extension to the low 1,500 area. While that is a somewhat exciting higher Objective, as the assumed next level of resistance that also creates the question of whether the market is ready to go that far right away.

It looks like we will get an answer fairly soon on the question of whether the major intermediate-term S&P 500 future 1,475-1,340 trading range is ready to be broken to the upside? Does the market really have the ammunition to stage a major jailbreak?

 

General Market Observations

Adding to the generally critical nature of the 1,475 area for the March S&P 500 future are the longer-term historic congestion and current weekly Oscillator indications. On past form there is not much congestion between the 1,475 area (which was an interim level in any event back in 2007 and 2000) and the 1,510 and 1,525 areas.

Interestingly enough, that plays right into the historic weekly Oscillator thresholds as well. There tends to be fairly good resistance at MA-41 plus 75-80, above which there is not much resistance again until roughly 115 over the longer-term average. And where might the 41 week moving average be right now? Just above 1,390 into next week, and only rising modestly each week. Of course, that makes any weekly Close well above 1,478 violation of a significant Oscillator level, with the next threshold not until the low-1,500 area.

Of course, even if the market should fail from here in the near-term, there is plenty of support waiting in the yawning gap that was left on the first trading day of the year. That includes initial support at the 1,444 top of the gap (i.e. the low of the day on major January 2nd gap higher), and far more major support at the heavy congestion at the lower end of the gap into the 1,425-20 area. This fits in with the ‘macro’ side of the macro-technical picture where we expect fundamental influences from corporate earnings and somewhat positive December data (such as the better-than-expected Chinese trade balance) to underpin the market on any setbacks; even a somewhat significant one that the test of 1,425-20 area would represent that this point.

EXTENDED TREND IMPLICATIONS

All of that upbeat sentiment and continued equities strength was a formula for primary government bond markets to go back on the defensive. While the move today seemed very sharp on the latter, the govvies rally of the past several sessions was a typical govvies ‘hostage to fortune’ rally on anticipation that equities might indeed weaken once again.

No equities selloff, or even more so further equities strength back around or above recent highs, and there was commensurately no reason for govvies to keep the bid. In fact, both the March Gilt future and March Bund future dropping back around recent lows seems a reasonable and proportional response. That puts the former right back into its 116.30-.00 interim support, and the latter into its somewhat more meaningful 142.62-.30 range.

Much below those areas each can fall another half point to their next interim supports, with the more major support not until March Gilt future 114.50, and in the 141.30-.00 range in the March Bund future. And given that it is still at premium pricing since the December contract expiration relative to the other govvies, it will be especially for watch whether the March Bund can indeed hold that support, or might sink down to the more major lower support in the 141.00 area.  

March T-note future on the other hand still seems to be buffered by the influence of the continued Fed quantitative easing program, as it has only barely once again retested its significant 131-16/-12 support that was so vigorously tested late last week.

We will have much more to say on foreign exchange very soon in an extensive end of week update that will include observations on the extended weakness of the Japanese yen, as well as the sudden resurgence of the euro currency.

Thanks for your interest.

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