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Checking the Technicals

08/07/2013

Global capital markets have experienced a strong start to the third quarter pushing many indices to new all-time highs. The next few weeks can clearly be defined as “the dog days of summer”, as the large majority of companies have reported earnings and much of the relevant economic data has already been released. Therefore, investors and traders will be void of headline catalysts. With that in mind the relevancy of “technicals” elevates.

The S&P 500® Index (SPX) established a new all-time high (Figure 1.1) on August 2 at 1709.67. Subsequent trade has marginally corrected with 1687.18, the apparent target. This level will act as near-term support as it is now a critical “swing area”. Previously 1687.18 was the all-time high established on May 22, 2013 acting as resistance during the June, “30 days of frustration”.  Finally, on July 18 strong earnings and a surprisingly strong Philly Fed fueled a rally through the May 22 high.

A deeper sustained decline, consecutive closes below 1687.18 over a three-day period, clears a path to the 50-day moving average at 1650.02 and July 11th’s post FOMC minutes breakout level at 1652. The 100-day moving average rests at 1621.09 and the 200-day moving average rests at 1539.76. In between is the June 24th SPX trough at 1560.33.

The currency markets have been a leading indicator as to the direction of global indices. To that point, I would focus on the U.S. dollar and the Japanese yen.

Over the past few sessions the Japanese Yen (Figure 1.2) has mildly appreciated which is counter to its prevailing 2013 bear trend and stalls the tailwind that a declining yen has provided for global capital markets. Investors will be watching to previous trough levels from April 2, 2013 at 92.57 and June 13, 2013 at 93.79. Also, layered within those levels is the 200-day moving average at 93.26. The Yen (Figure 1.3) has not violated the 200-day moving average since investors were provided the clarity that Shinzo Abe would become the Japanese prime minister.

Finally, the U.S. Dollar has appreciated 2.3% year to date. Further, U.S. Dollar strength signals an acceleration of economic growth and will support further Russell  2000® Index (RTY) outperformance. However, the dollar is weakening since its July 9, 2013 three-year high at 84.753. Keep an eye below the market on a key support area between 78.50 & 79.25. This range (Figure 1.4) provided the “foundation” during the Fall of 2012 for the 2013 dollar advance.

Figure 1.1 S&P 500 Index (SPX) 2013 with critical support levels
8-7-2013 Terranova 1.1
Source: Bloomberg

Figure 1.2 Japanese Yen 2013 with critical support levels
8-7-2013 Terranova 1.2
Source: Bloomberg

Figure 1.3 Japanese Yen performance relative to the 200-day moving average
8-7-2013 Terranova 1.3
Source: Bloomberg

Figure 1.4 U.S. Dollar 2009 to 2013 with Fall 2012 support 78.50-79.25 annotated
8-7-2013 Terranova 1.4
Source: Bloomberg

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.