Be (Cautiously) Optimistic Going Into Q2

by Serge Berger | April 2, 2012 8:17 am

Everybody knows it: Stocks put in another rip-roaring quarter as the closing-bell rang last Friday. The bulls are back and confident as ever, the economy is improving, Europe is solved and politicians are once again holding hands and skipping through flower fields.

Fine, maybe that’s not exactly the state of affairs, but the media sure makes things look real rosy at the moment. Whether or not everything really is as great is a topic for another column, but let’s look at the technical side of the S&P 500, which is a good barometer for the broader trends in U.S. stocks.

The S&P 500 on Friday rose 0.8% to 1,408.47 and closed the first quarter of 2012 up 12%.

It sure was a great start to the year, and historically speaking, this should last for the remainder of the year — and the index should close higher for the year. However, no two times are the same, and this time with central bank liquidity infusions, it is anything but a “normal” recovery.

Stocks rose nicely in the first quarters of 2010 and 2011, but the second quarter brought more volatility and lower prices in both years. Will this year see a repeat? I hesitate to simply look back to a recent year for comparisons, but in this case it might at least — at the margin — make sense to look over the left shoulder, as central bank stimulus of this magnitude has simply never been done before.

From a pure technical perspective, here is where the S&P 500 stands in terms of next support and upside resistance levels:

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The latest big swing up started on Dec. 19 and measured about 17%. The very strong uptrend since then brings us our first support level at 1,388, which also served as support on March 23 and just a few points higher served as support last week.

The 30-minute chart looking back to late February shows the development of what could become a classic head-and-shoulders formation. A break below the 1,388 level could result in a move to 1,360, which would be the classic target if the head-and-shoulders pattern works out.

The daily chart looking back to December 2011 shows the aforementioned uptrend. Should 1,388 break, the next support to look for would be at 1,375, followed by 1,340. A break of 1,340 could then trigger a move down to the 1,290-1,310 area for next support.

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In case of a further rally, my next upside targets are 1,424 and 1,440. The latter level was resistance in May 2008 and could act as a magnet if we break 1,420 and any of the aforementioned support levels hold.

In order to trade off the technicals on the charts, it is important to understand the dynamics in play here. Central banks have more ammunition yet, but understand that if stocks turn for a breather (or worse), it will come quickly and won’t leave much — if any — time to get out.

Reducing or at least hedging long positions in stocks here might be something to consider as we slip into the second quarter.

Serge Berger is the head trader and investment strategist for The Steady Trader[1]. Sign up for his free weekly newsletter[2].

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