Markets in the US traded around the flat-line on Monday as investors showed little conviction to alter portfolio allocations prior to the two-day fed meeting that begins on Tuesday.   Investors/traders are largely anticipating some hint of QE3 as the committee meets for the first time this year.   The certainty of this event is up for much debate.   On the one hand, economic data has shown improvement as of recent and the Fed’s target for unemployment has been met much earlier than was previously forecasted.   However, it is becoming clear from recent price index data that deflation is gradually becoming evident, which the Fed may perceive as a threat to the present economic momentum.   Much will be considered and a lot more will be anticipated, but the final result may set the market up for failure given the complacent mentality of many investors.  

With the month of January nearing an end, I thought it might be a good idea to  pull up a monthly chart of the S&P 500 to see the longer term picture going forward.   The chart shows consecutive higher highs and higher lows from the March 2009 low, a bullish pattern for the market.    Despite the plunge back in August and doom & gloom speculations that have accompanied, the trend remains higher until the point in time when a lower significant high (or low) can be achieved.   Presently very few analysts are forecasting anything above last May’s peak around 1370, suggesting that investors may look to heavily liquidate positions should the equity benchmark push closer to this level.   The concern then becomes that a lower high may be fulfilled, which would create a pattern that resembles a head-and-shoulders top; a pattern than would imply downside potential to a range between 800 to 900, or over 30% lower from present levels.   The decreasing volume as of recent, showing waning conviction, provides merit to this bearish scenario.   This bearish possibility remains just that, “a possibility”, until confirmation of the next intermediate high is obtained.   The chart also shows one other bearish quality.   The 50-month moving average appears destined to cross below the 200-month average, an event that has not been seen for many decades.   This bearish omen is more of an interesting note rather than any tradable indicator due to the extreme lag in these moving averages compared to the price action.   The key take away from this chart is that markets are nearing an important juncture with much to prove as it pertains to the bullish case.   Upside conviction remains relatively absent and momentum indicators are not showing any significant strength either.   The longer-term path for the market could become clear fairly quickly over the next couple of months.