After seven weeks of gains, the major indexes have finally reached significant resistance. The dow closed over 17,750 at 17,793 and in the first significant resistance zone. There was a surge in buying by portfolio managers at the close on Friday with $1.5 billion in market on close buy orders. This succeeded in pushing the Dow over that initial resistance at 17,750. There is a strong band of resistance from 17,750 to 17,925 and again from 18,000 to 18,165. Further gains should be difficult but you never know when market sentiment could suddenly turn bullish and power the indexes higher.
There is currently more than $1 trillion in short positions that could turn into kryptonite for the holders if the indexes suddenly moved higher.
The S&P is near but not yet in its resistance band and the S&P should be more reactive than the Dow to that resistance. The Dow only has 30 stocks and any 5-7 posting significant gains on a given day can push the index higher. The S&P is much more widely followed by index funds, portfolio managers, investors and traders. The support and resistance levels are much more reactive because there are millions of people making decisions based on the index reaction.
The S&P resistance starts at 2,075 and continues to 2,128. Those 53 points could be a significant minefield as the trading robots react to each resistance level.
The market is very over extended but nothing prevents it from becoming even more over extended. The current rebound has duplicated the rebound from October and these patterns tend to repeat. The S&P dropped nearly 100 points when that October rebound hit resistance and lost traction. There is significant risk that we could see that repeat in April.
The price of crude oil is also going to be a factor. With the support crumbling for the OPEC meeting on April 17th in Doha Qatar the headlines have turned negative and that should be a pressure on the equity market. Crude declined sharply on Friday and equities collapsed at the open. However, the beginning of a new quarter and inflow of retirement funds helped to disconnect equities from crude. After Monday, there may be a reconnect as those quarter end fund flows dry up.
The economic calendar for next week is headlined by the FOMC minutes on Wednesday and a major appearance by Fed heads on Thursday. Janet Yellen, Ben Bernanke, Alan Greenspan and Paul Volcker will all participate in a round table discussion at 5:30 on Thursday. It is after the market closes but you can bet it will influence the open on Friday. I do not recall in my last 30 years of trading an event where four Fed Chairmen all argued Fed policy at the same table. This will be a spectacle to remember depending on how it is handled and how analysts report it.
I did not add any new stocks to the watch list this week. I want to see how the market responds to this resistance before adding a lot of new positions. I would rather wait for a buying opportunity than continually buy the "top" of this rally. If we got that 100 point decline on the S&P there would be a lot of opportunities.
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