Bulls Break Out

August 12, 2012

52

Bulls break out on hopes for central bank support

After a May swoon and choppy sideways action through June and July, markets have turned sharply higher to break through solid resistance. More resistance lies ahead, but, for now, the bulls have moved the short, medium and long term trends to the upside.

chart courtesy of StockCharts.com

In the point and figure chart of the S&P 500 (NYSEARCA:SPY) we see that a triple top breakout occurred last week on August 7th which is a strong bullish signal and the upside price objective is 1550. Strong resistance lies between here and 1420 which is the yearly high set in April. Support and a negative trend change lie at the blue bullish support line at 1340-1350.

View From the Summit

Economic news last week showed jobless claims improving while productivity was up and labor costs were down over the previous month. Europe remained a hot spot as Italy reported another quarter of declining GDP and Spanish 10 year bond yields stayed near the “unsustainable” 10% level.

But the big news and the only news that counted came from the Federal Reserve as Boston Fed President said that he supported an open ended quantitative easing program and he was joined by San Francisco Federal Reserve President John Williams on Friday who said that he is also in favor of more asset purchases. This follows Chairman Bernanke’s recent comments to Congress that the Fed was ready to act if needed.

Overseas, Mario Draghi continues to rally his forces to save Italy and Spain and so global markets seem to be counting on central bank intervention to once again save the day. For the week, the Hang Seng (NYSEARCA:EWH) gained 1.8%. The S&P 500 gained more than 1% while the Dow Jones Industrial Average (NYSEARCA:DIA) climbed 0.9% for the week. The Dow and S&P 500 are up for five weeks straight while the S&P 500 is up 10% since June 1st. The Nasdaq Composite (NYSEARCA:QQQ) added 1.8% on the week to log its fourth weekly gain in a row. The Russell 2000 (NYSEARCA:IWM) added 1.6% for the week

While fundamental indicators remain troublesome with slowing global economies and persistently high unemployment, markets are looking for more help from the Federal Reserve and European Central Bank. Key events will be Dr. Bernanke’s speech at the annual Federal Reserve symposium in Jackson Hole at the end of August, Mario Draghi’s success in engineering a resolution to the crises in Spain and Italy and the Federal Reserve September meeting at which a new round of quantitative easing is widely expected.

Next week brings a raft of economic reports including retail sales on Tuesday, Empire State Index, Industrial Production and Home Builders Index on Wednesday, Weekly Unemployment, Housing Starts and Philadelphia Federal Reserve Report on Thursday and University of Michigan Consumer Sentiment and Leading Indicators on Friday.

Bottom line: Bulls take control of global stock markets as central bankers are almost shouting that more monetary easing lies just ahead. Markets are pricing in additional Federal Reserve action in September and bulls should continue to rule unless the Fed disappoints or Europe implodes.

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