A Taste of Things to Come?

It’s been good eatin for the bulls so far this year…at least when it comes to the U.S. markets. The S&P 500 managed to trade to an intraday high of 1,687 this very week after closing out 2012 at 1,426 – an 18 percent rise in less than six months.

No doubt the bulls would like to keep feasting at that table…or should we call it a trough? I’m not about to guess whether the weakness of the past couple days is anything more than a breather – merely letting the belt out a bit before more feasting takes place – or the start of a new diet.

What is worth thinking about is the fact the market here and those overseas turned pretty sharply in reaction to Bernanke’s congressional testimony regarding the slowing of the Fed’s purchasing program. It’s clear the market soured on such language.

Might it be mere hiccups or some indigestion? Who knows…? To me the real question is whether the market action portends what we should expect when the Fed turns down, and eventually off, the spigot. A question for another day, given the Fed doesn’t appear ready to do so as of yet.

That said, it’s no secret everybody out there is cautionary in terms of how far this rally can extend before we see some retracement of note…perhaps even a correction. The certainty is it will happen at some point – may be now for all we know. Whatever the case, at a minimum it makes sense to take a look at the map to get a sense of possible near-term stopping points we should be aware of.

Low-and-behold, the high set this week stopped right at the upper border (resistance) of the recovery channel established off the March 09 lows. Just above that is the psychological level of 1,700, followed by a long-term trendline that has been significant as both support and resistance dating from the 09 low and in each year thereafter in terms of reversal spots and a key trend-break confirmation point. That line is now sitting around 1,720ish. Significant levels likely to spell the end of this rally?

Time will tell…

~LH