Still Bullish but Overbought
US Trading: The concerted action from central banks has been extending last weeks rally but with our short-term momentum indicators reaching overbought extremes as well as moving into initial price resistance the SPX is getting vulnerable for profit taking. Early this week we expect a test of the 200-day moving average at 1265 but given the increasingly overbought stance and the unsustainable momentum we wouldn’t be surprised to see a pullback later this week/next week towards 1220 before starting a final rally into deeper December.
The November 25th reaction low at 1158 remains a pivotal support as it represents a higher low versus the early October low. As long as the market trades above this level the short- to medium-term price structure remains constructive. On the upside we have a strong resistance area at 1292 (late October high) to 1304, which we still expect to be tested into deeper December. From a trading standpoint we maintain a bullish bias although at the end of the day we are talking about the last 3% on the upside before a meaningful setback starts into January. So all in all we would concentrate on selling into further strength instead of chasing the market. Into late January we expect at least a re-test of the late November low at 1158.
US Strategy: In our early October strategy call we said that from the October 4th low we expect the SPX to start a corrective (a-b-c) countertrend rally that should finally unfold in a volatile sideways trading range into deeper Q1 before resuming the underlying bear market into the second half 2012. The critical level for this call was and remains the October 4th low at 1074; as long as the SPX trades above this level we have no reason to change our underlying tactical strategy. Again, if we are correct then it is unlikely to see any bigger trend moves developing over the next few weeks, which means the market remains pretty much trading oriented and therefore a sell into any kind of stronger rallies.
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