S&P500 Futures Outlook

February 19, 2010

Name: Alan Bush

Company: Archer Financial Services

Years Trading: 32

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S&P500 Futures Outlook
By Alan Bush, Archer Financial Services

TECHNICAL REVERSAL SIGNAL

An important rule of thumb is a market often will bottom after the very last chart support area has been taken out and the chart pattern looks horrendous. This is a situation where the "last of the longs" have given up, after a long decline in prices and after a new chart sell signal has been generated. This situation took place in March of 2009 in the S&P500 futures, when prices fell below the October 2002 low of 767.25. An astute technician may have correctly predicted that a major buying opportunity would not present itself until the likely resting sell stops under this last and most obvious chart support area were taken out. Many times it is only after the longs have been liquidated, along with a period of new technically based selling, that futures can embark on a new bull market.

S&P500 FUTURES-MONTHLY

Chart Provided by APEX

After the lows for the move were registered in March 2009, prices were able to sharply advance. In this instance, the S&P500 futures were able to rebound to the 1148.00 level, which is over a 50% retracement from the move down from the 1586.75 high that was registered in October 2007 to the 665.75 low that was made in March 2009. It is often the case that a major technical sign of strength can take place, when prices have been declining for a very long time and a new extremely obvious chart sell signal has been generated. Before an entry on the long side, some time should be allowed for the likely new technically induced selling to run its course that will probably be generated by a price drop to a new low for the move.

TECHNICAL SIGN OF STRENGTH - MARKET IGNORES BEARISH NEWS

Last week we started to see futures beginning to under react to bearish news. For example, even though there was news that a resolution to the sovereign debt crisis in the euro zone appeared to be a long way off, we are starting to see futures stop going down on bearish news. This week we are seeing futures beginning to over perform on the up side on mildly bullish news. This could be a sign that the recent downside correction is nearing an end. The rule of thumb is that any time a market is able to stop going down or advance on bearish news, it is a sign that prices are likely to move higher. It is also an indication that any time a market is able to over perform on bullish news it is a sign that higher prices for that market are likely in the near future. Currently we are seeing multiple cases of the bullish application of this trading rule. Bearish news continues to be ignored as futures prices advance. For example, recently, futures prices were able to hold up even though it was reported that the Greek civil servants union said it may join a February 24th strike being planned by the largest private sector union in Greece.

FUNDAMENTAL INDICATORS

Prices recently advanced on the growing belief that the budget problems in the euro zone will eventually be sorted out. The European Union is pressuring Greece to make deeper cuts in their budget and has given them until March 16th to present additional budget reductions. European Central Bank President Trichet said the ECB is confident that Greece will cut its deficit below the limit of 3% of gross domestic product in 2012 from the current level of 12.7%.

Most of the recent economic reports have been stronger than the analysts' median estimates. For example, last week it was reported that January retail sales were up .5%, which compares to an estimate of a .3% increase and this week the February New York Fed Manufacturing Index was 24.91, which compared to an estimate of 18. In addition, the February National Association of Home Builders housing market index was 17, when 16 was anticipated.

Fourth quarter corporate earnings remain strong. Earnings for S&P500 companies have been better than the analysts' median estimates by over 76% of the time. This is the second highest percentage on record, according to a Bloomberg survey. Also, according to a recent survey, U.S. corporate executives are increasing earnings estimates at the fastest pace in almost eight years, which according to our analysis, appears to be the right thing to do.

Federal Reserve policy remains friendly for stock index futures and is likely to remain so for the foreseeable future. We believe that the next tightening of credit from the Federal Open Market Committee will not take place until after the mid-term elections or even not until 2011. Over the last six months, prospects of tighter credit from the Federal Reserve continue to get pushed farther out into the future. Currently there is only a 26% probability that the Federal Open Market Committee will increase the fed funds target by 25 basis points to 50 basis points at or before their August meeting and a 54% chance that they will increase the rate at their September meeting, according to the financial futures markets.

CONCLUSION

Our analysis continues to tell us that we will see recovery in the economy and that the majority of economic reports and corporate earnings reports will be stronger than the median estimates. The corrections to this bull market that we saw last July, November and in late January and early February of this year are just that; only corrections in a multi-year bull market.

If you have any questions or comments about this article, please call 1.877.690.7303 or send an email to alan.bush@archerfinancials.com .

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.

The ADMIS Commodity Chart Book - Authored by Alan Bush

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About the Author

Alan Bush has been a commodity analyst since 1976 focusing on the fundamental and technical aspects of stock index, interest rate and foreign currency markets. He has authored several articles for Stocks Futures and Options magazine and produced the “Futures Tech Focus” program, which is a technically based market outlook.

Alan served on the faculty of Oakton College as instructor of a course entitled, “Principles of Technical Analysis.” He has been interviewed on many national television programs, appearing on the Nightly Business Report, CNBC, CNN Moneyline, Reuters Television and Web FN. In addition, he has been frequently quoted in The Wall Street Journal, USA Today, The Bond Buyer and the Chicago Tribune and has been regularly interviewed on Chicago’s WMAQ radio business reports.

Alan can be reached at (312) 242-7911, or via email at alan.bush@archerfinancials.com.