The last three months have been fairly volatile ones for equity markets in general and certainly the first quarter of 2010 began promisingly.
However, the two months since April 2010, after promising much, have delivered nothing but sharp declines as early optimism over economic recovery has given way to fears over European sovereign debt, bank solvency in the Eurozone, and questions of austerity over stimulus. All this has driven asset prices lower over the last 4-5 weeks.
One minute the market is bullishly risk on and the next the market is aggressively risk-off. Of all the asset classes that traditionally perform negatively with respect to stock prices, it has been fairly noteworthy that Gold has continued to perform well. This is in spite of the recent robustness bullishness amongst certain pundits with respect to equity markets and the economic recovery.
This gold bullishness signals to me that there remains ambient uncertainty with respect to the strength of the recovery and whether the current problems in Europe could spread out beyond the EU into the global economy.
The S+P 500 had, until this quarter, posted 4 successive quarterly gains in a row since posting its lows of 666.80 at the end of March 2009. It has pretty much moved in lock step with the Dow Jones since then, and the declines in the last 2 months have put these indices near to some key support levels.
It has been notable that since the all time highs in 2007, at around 1,576.10, and the subsequent decline to last years lows of 666.80, the S+P managed to pull back to the 61.8% Fibonacci retracement of those declines before running into profit-taking. The markets also rebounded back from the 200 week moving average on both indices.
Looking at the Dow Jones Industrial Average we can see, not surprisingly, a similar scenario being played out with respect to these resistance levels.
Both indices have fallen back quite significantly over the last 2 months and the question is now whether or not the current fall in prices represents a buying opportunity, or whether there is further weakness to come.
The key price levels to keep an eye on with respect to daily closes on the S+P 500 and the Dow Jones are around the 1,040, and the 9,800 areas respectively.
A close below the 9,800 area on the Dow would be the lowest close since September 2009. Neverthless, it could be the S+P 500 that could provide the most intriguing clues as to the next direction for equity markets over the coming days and weeks.
The S+P 500 has, over the past few months, been playing out what looks like a messy head and shoulders type of pattern, with a neckline around the 1,040 area.
A close below this level, being that it would also be the lowest close since September last year, could well undermine sentiment even further. In fact, given that a number of related indicators like Copper and the Reuters CRB are also flashing warning signs, it could be a pre-cursor to further equity market declines in the short term.
An interim target for the S+P 500 would be an initial test towards the 1,000 level on a close below the neckline around 1,040.
Given the nature of recent price movement the market badly needs an injection of good news to re-invigorate risk appetite, and pull the markets off these recent lows.
As I write this, today’s US private sector ADP jobs report for June has disappointed the market, coming in at a mere 13k jobs against an expectation of 60k.
Hopefully Fridays US Non Farms jobs report will provide some much needed good news. If not then investors could well be in for a bumpy ride over the coming days and weeks.
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'US Index Spreads Fall to Key Support Levels', Feature by D. Jones, last update: 2-Jul-10
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