Some market conditions provide plenty of clues about where the breakout is going to occur. Unfortunately, that’s not the case with the consolidation range the S&P 500 is in right now.
Right now, the only thing we know is that it has a downward trending resistance level somewhere around 1,470 and an upward trending support level somewhere around 1,435. Other than that, we can only speculate as to how this consolidation range is going to play out.
The interesting thing is that any one of the following three factors could turn this consolidation range into either a bullish continuation pattern (by sending the S&P 500 up through resistance) or a bearish reversal pattern (by sending the S&P 500 down through support): Q3 earnings season, the European crisis and the fiscal cliff.
Q3 Earnings Season
We just kicked off earnings season this week, and so far we haven’t seen any announcements that have been too disruptive. We’re seeing a continuation of the trend that started last quarter of lower top-line revenues accompanied by better-than-expected bottom-line earnings, but Wall Street hasn’t made a bearish reaction to that yet.
European Crisis
The great unknown in the European crisis is whether Spain is ever going to officially ask for help from the European Central Bank’s Outright Monetary Transaction bond-buying program. Investors were elated when the ECB announced its OMT program, but if Spain doesn’t actually make use of it, the central bank’s efforts will have all been for naught.
Fiscal Cliff
At the stroke of midnight on Dec. 31, 2012, unless the U.S. Congress takes action, we’re going to go over the fiscal cliff as Bush-era tax cuts expire, the payroll tax cuts expire and $1 trillion in spending cuts for the federal government automatically go into effect. The Congressional Budget Office estimates that going over the fiscal cliff will send the U.S. economy back into a recession.
If we see earnings start to sour, the situation in Europe start to deteriorate or increased rhetoric from U.S. politicians that they’re going to play hardball with the fiscal cliff, watch for the consolidation pattern on the S&P 500 to turn into a bearish reversal pattern.
If we see earnings come in better than expected, Spain officially ask for help from the ECB’s OMT program or U.S. politicians announce that they’re making progress on avoiding the fiscal cliff, watch for the consolidation pattern on the S&P 500 to turn into a bullish continuation pattern.
If we see lackluster (but not disappointing) earnings, continued talks that make no progress in Europe and no reports of any progress on avoiding the fiscal cliff, watch for the consolidation pattern on the S&P 500 to continue for the time being.
John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.
