S&P500 Stock Market Consolidation Continues

By: Donald_W_Dony

Models continue to support the outlook of restrained upward movement into Q1. The broad-based S&P 500 is encountering downward pressure from two directions. After 10 months of steady advances, the index has entered a significant resistance band that dates back eight years. The zone of 1070 to 1200 stalled both the steep bear market plunge in late 2001 and the held in-check the new bull market in early 2005.

Another limiting growth factor is the rising Euro/Yen cross. This Carry Trade provides an important source of capital for institutional traders (Chart3). An advancing cross means the Yen is out performing the Euro which reduces the profitability of the Carry Trade. Models for the Yen/Euro cross point to a high probability of a continuation of the present upward trend into Q1.

Mid-term cycle models (Chart 1) highlight the current trading pattern of the S&P 500. Over the past 20 months, the index has developed key lows approximately every 16 weeks. The troughs in 2009 were in March, July and November. Models indicate increasing downward pressure should occur by February as the next expected low in March 2010 draws near.

Bottom line: Market outlook for the S&P 500 appears limited until March. Dominate factors of price resistance and reduced profitability of the Carry Trade are overriding, short-term, the improving fundamentals of the US economy.

Investment approach: Long-term investors may wish to use the next significant low in March as an opportunity to add or increase portfolio positions. Shorter-term models suggest shallow lows should develop in early January and February. Traders may want to add to positions at these anticipated troughs.

More research is available in the December newsletter. Go to www.technicalspeculator.com and click on member login.

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2009 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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