The Edge: Choppy Waters on the Horizon

The Trading Edge with Derek HoffmanEverybody has been sifting through their 2010 Investment Outlooks to try to get a handle on what this year will mean for our portfolios. After sifting through stacks of reports, I see a very mixed picture.

Today’s picture does not present us with a consensus view for the year because there are a lot of bulls and bears. The trend has been our friend — so we don’t ever want to fight the tape and look for trading signals.

This morning, I’m looking at an S&P 500 chart over a time frame that dates back to June 2008. Note the 3 white lines on the S&P chart below. These 3 lines represent important levels of support/resistance that I have mentioned in the past. The top white line is at S&P 1120, the middle white line is at S&P 1080 and the bottom white line is at S&P 1022.

Today, the S&P sits at 1144.98 with a 50 day MA at 1100 and a 200 day MA at 952. With a deviation growing between the current S&P level and the 50 day MA, and a very low Volatility Index, look for a market ‘cooling’ pullback and test of the 50 day MA if earnings disappoint already inflated estimates. If the engines continue to roar the markets upward, look at S&P 1175 as a first potential ‘exhuberance’ target.

“Our analyses only inform us of historical tendencies. If a market is not behaving in a manner that is consistent with its history, this alerts us to unique, situational forces at work.” – Dr. Brett Steenbarger

Earnings season kicks into official swing this week when the first batch of heavyweights report: Alcoa (AA) on Monday, Intel (INTC) on Thursday, General Electric (GE) and JP Morgan (JPM) on Friday. Expectations are very high at the moment, so remain cautiously nimble.

Since last year’s quarterly numbers were horrific during this time of year, look for year-over-year earnings percentage increases that may seem rather eye bulging. The real question is whether the holiday eggnog buzz will continue the blurred ‘Market Goggles’ vision …

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