By Jim Donnelly, Olson Global Markets
In the absence of an agreement in Washington, as well as an absence of fresh economic data from the U.S. Bureau of Labor Statistics, equity prices have responded to hints and whispers from various political sources last week with wide swings. And although equity trading ended the week on an upswing with a sense of optimism that an agreement would be reached, the technical set-up of the S&P 500 index (SPX) is a bit troublesome.
While there is an opportunity for the S&P 500 index to move higher and possibly test key (upward sloping) trend line resistance currently sitting at 1,744, bearish technical divergences are now present on both weekly MACD (Moving Average Convergence/Divergence) and weekly RSI (Relative Strength Indicator) studies. A bearish divergence is a reflection of the fact that the S&P 500 index (SPX) itself has moved irregularly higher to successively higher peaks, with corresponding highs in the underlying technical indicators rising, but to consecutively lower peaks. When a set-up like this occurs, technical analysts are generally on the alert for corrective price action to the downside.
Another concern would arise if the S&P 500 index (SPX) were to break below key trend line support currently at 1,645. Such a break would raise the likelihood of a possible move down to a test of key trend line support now sitting at 1,540.
In order to offset the implications of this bearish technical scenario, a burst of optimism triggered by either an agreement in Washington, or a series of better-than-expected Q3 earning results, or both would have to lift the S&P 500 Index well above resistance currently at 1,744. With the potential crisis date of October 17 quickly approaching, and with a series of earnings reports due out this coming week from a host of major companies, a resolve to these potential triggers should emerge soon.
Q3 earnings due to be reported this week include: American Express (AXP), Bank of America (BAC), Citigroup (C) , Google (GOOG), Goldman Sachs (GS), Intel (INTC), Johnson & Johnson (JNJ), Coca-Cola (KO) Pepsi (PEP) and Yahoo! (YHOO).