S&P fails to penetrate ceiling despite positive results

Prior to the first quarter reporting season much was said about the strength of the US dollar and the weather, among other things. But the results have so far been surprisingly good. After last week’s better than expected numbers from the banking sector, we heard some more good news from the likes of IBM, United Technologies, Verizon and DuPont. However despite this, the S&P 500 and other US indices are struggling to hold onto their earlier gains. Investors are probably exercising caution ahead of this week’s other key earnings results with Yahoo due to report after the closing bell tonight; Facebook, eBay, McDonalds and Coca Cola on Wednesday and Google, Starbucks, Microsoft, Caterpillar and GM, among others, on Thursday. The lack of US economic data is also holding investors back today.

The S&P’s struggle to push higher despite the positive tone coming out of Corporate America may be explained away by looking at the technicals. As can be seen from the 4-hour chart, a bear trend going back to February 25 has been providing stiff resistance for the S&P. Each time the index has tried to break to a fresh multi-year high, the sellers have stepped in here, driving the index lower. But the most recent move lower from here stalled at around 2070/5, which was significantly higher than the prior low around 2040/2. In other words, the index created a lower high then, which is a potentially bullish outcome. What’s more, the momentum indicator, MACD, has now crossed above the signal line and is holding above zero. This suggests that the bearish momentum may be fading. Thus, if earnings continue to surprise to the upside then soon or later the S&P may break higher and achieve a new record above 2120. If it does, the first couple of bullish targets would be the Fibonacci extension levels shown on the chart. However, a potential break below the aforementioned 2070/5 support may give rise to further follow-up technical selling and pave the way for another move towards the 2040/2 floor.

But even if the S&P goes on to break the 2040/2 support eventually, the long-term bullish trend would still remain intact for as long as it remains inside the bullish channel that goes back all the way to October 2010 (see the weekly chart in figure 2).