The S&P 500 cash index (SPX) closed at 1343.1 on Friday, up 13.73 points on the week for a net weekly gain of about 1.03%.
All three major market indexes made impressive highs and stayed above their key resistance level. In particular the SPX topped out at 1344.07, a level it has not seen since June 19, 2008.
This week is shortened by the holiday. We may see a pullback move. But as long as the long-term uptrend remains intact, a short-term pullback is just a healthy retracement in the long term trend.
SPX weekly chart
Based on SPX weekly chart (above), it is very clear that the up-wave C hasn’t completed yet in the intermediate or long term. This uptrend is likely to continue further up each time the SPX breaks key resistance levels and turns them into support.
Right now 1310 becomes the first key support level for SPX in the short-term. For the long term, 1250 has become the major support level. As long as there is no reversal sign for the intermediate and long term, any short-term correction will not last very long and will not go very far.
For the short-term, SPX has rallied for 13 days. The bullish holiday period should be ended today. In addition, 1368 is a key Fibonacci extension level from impulse wave A. The key level will become this week’s major resistance level. SPX may pause its advance for little while by either going sideway or making a small pullback move.
Economic and political view
Inflationary pressures have been rising in many major global economies for quite some time and are now widely acknowledged. Some countries have had to raise their interest rates and tighten monetary policies in efforts to bring prices under control.
In the U.S. official inflation statements are muted, in part because official data is manipulated to keep both inflation and unemployment numbers low. In a speech on Friday Fed Chairman Bernanke remained remarkably unconcerned about inflation.
This shouldn’t surprise us; inflation benefits borrowers, and nobody borrows more than the U.S. government.
An important outcome of many current policies is to devalue the U.S. dollar assets of foreign lenders.
Disorder in other countries also helps; the more investors worry about instability overseas, the more U.S. markets look like a safe alternative.
Money could flow back into the U.S. stock market and stay in it. This is one reason why our market has been so bullish. But current U.S. policy is unsustainable.
There are also political considerations. High unemployment will be an election issue in 2012.
Expect the Fed to try to focus on unemployment by continuing its easy money policies, and expect “good” economic numbers to continue showing up until the election is done. But by that time the inflation bubble, particularly in commodities, may be far out of control, and a big correction in the stock market may occur.
Bottom line, we expect our stock market will try to hold up on every short-term pull back before the election.
Monthly resistance 1350 and support 1250; Weekly resistance 1345 and support 1310
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