SPX Rising Wedge

The SPX two-year weekly chart below shows a rising wedge with a negative MACD divergence. SPX closed the week near resistance and in an overbought condition. Major resistance is around 1,270, i.e. upper weekly Bollinger Band. There are further resistance levels at the upper monthly macd histogram Bollinger Band just above 1,275 (not shown), and at the upper wedge line around 1,290. Moreover, MACD is currently near resistance, and the weekly oscillator (ULT) is above 70, which is severely overbought for an index. Major support is the previous four-year high at 1,246. Consequently, the volatile consolidation that started last week may continue in December.

Economic conditions remain robust. Real GDP growth continues to expand above 4%, inflation remains tame at around 3%, and profits continue to grow at a double digit pace. Monetary policy is still accommodative and fiscal policy remains stimulative. There are few signs of strain in the economy with the unemployment rate at 5% and capacity utilization below 80%. However, commodity prices remain high (reflecting economic strain in foreign economies, particularly in Asia) and the housing market continues to boom, although slowing somewhat. Moreover, there are bullish psychological factors. Financial markets are pricing-in an end to the Fed tightening cycle, early next year, and money managers want their funds to finish the year with the highest possible returns. Consequently, SPX may hold 1,246 in December.

Economic reports next week are: Monday-ISM Services, Tuesday-Productivity and Factory Orders, Wednesday-Crude Oil Inventories, Thursday-Unemployment Claims, Friday-Michigan Consumer Sentiment and Wholesale Inventories. Any data related to the holiday sales season, oil prices, and comments by Federal Reserve members will also influence the market. Moreover, OPEC meets December 12th, which may cause an upward bias in oil prices next week. Last week, third quarter real GDP was reported at 4.3%, which was stronger than expected. Consequently, the market fell Wednesday on inflation fears. However, when the market realized inflation remained contained, it rallied Thursday (also, new money at beginning of month and short-covering contributed to the rally). Other reports last week showed strong output and employment.

If SPX continues to rise into the end of the year, then the MACD downtrend line will be broken. Nasdaq broke above a similar rising wedge two weeks ago, and it’s currently about 40 points above the upper wedge line. However, the SPX upper wedge line may hold in December, because roughly 15% of SPX are energy stocks, which are currently at relatively high levels (OIH, an oil ETF, closed above 129 Friday, while oil closed at 59.32 a barrel. In August, when oil rose to 70.85, OIH was just below 120). It’s likely SPX will continue to consolidate and trade between roughly 1,250 and 1,270 next week.