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Some Interesting Technical Setups

10/13/2011
The capital markets continue to be plagued by a fundamental outlook that is as confusing and conflicted as any time in recent memory. As ominous as things were in 2008, at least the outlook was easily defined. Multiple tailwinds are in place that strongly suggest this is not 2008’s price action all over again.  However, “the absence of leadership” as a major headwind strongly suggests this is not the fall of 2010 either. What has changed in the past week, however, is the existence of multiple interesting technical formations that can guide investors through this turbulence.
 
Let’s take a look. . . .
 
S&P 500® Index
 
Over the past week, the Index has repriced higher on the expectation that a second recession will be avoided. Some points to consider:
 
  •  A near-term correction would need to hold at 1150.00 in order to protect the validity of the recovery from the 1074.77 low of October 4.
  •  Potential exists for October to trace out a “monthly outside reversal” with a close above 1229.29 on October 31.
  • A “monthly outside reversal” last occurred in July 2009 and would position the SPX for a challenge above this year’s 1257.64 unchanged level toward 1300. 
  • A close back below 1150.00 will encourage money managers to reassume the fall of 2011’s “cash register mentality.”


Source: Bloomberg
 
U.S. 10-Year Treasury
 
Concurrent with the recent advance in equities has been a rise in Treasury yields suggestive of a mild reallocation out of safe-haven Treasuries into “riskier assets.” This pattern will need to continue in order for the S&P 500 Index to advance further.
 
  • The 10-year yield has risen from the October 4 low of 1.6714% to as high as 2.2691% on October 12, a significant reversal that has advanced the 10-year above its 50-day moving average for the first time since late July when the “crisis of confidence” began.
  • What rests overhead is major resistance at 2.3302%. I expect a sustained advance above 2.3302% would encourage a more powerful allocation out of Treasuries into riskier assets.
  • The 2.3302% yield is relevant as was the bottoming price during last fall’s decline in yields. It subsequently provided support for the better part of 10 months until it was violated in August 2011.



Source: Bloomberg
 
Euro dollar
 
Renewed eurozone fears initiated an aggressive sell-off from 1.4500 in early September toward a low price of 1.3146 on October 4. What is most important to the appreciation equation for risk assets is that the euro stabilizes above that 1.3146 level. Significant euro appreciation is not a necessary condition for further risk asset upside. Rather, just having marked the bottom and holding above it should be enough.



Source: Bloomberg
 
A Final Note on Market Confidence and Leadership
 
I am rather confident in my assertion that what ails the markets is a crisis of confidence, as policy makers on both sides of the Atlantic have failed to exhibit fiscal and monetary leadership. Supportive of my belief is how sensitive the market is to any perceived improvement or the acknowledgement that there exists some form of adult supervision.
 
October 4 seems to be the day that is identified in all the charts above as a “turning point.” What happened that morning? Federal Reserve Chairman Ben Bernanke went before the Congressional Joint Economic Committee and defied the notion that he would be influenced politically in his decisions to aid the recovery.
 
Remember, in March 2009, Chairman Bernanke’s biggest fear  was “not having the political will to do what is necessary to sustain the recovery.” On October 4, I perceived Chairman Bernanke’s testimony as exhibiting some much needed financial leadership. The markets are obviously starved for leadership from our policy makers.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.