It’s going to be tough to leave politics for this week. There’s so much to talk about from the Circus that is the Republican Nominating Process. Still, the markets are calling and it’s time to pay attention to money.
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The S&P 500 is failing to break through resistance levels of around 1290. It has tried twice and failed both times. It must break through 1290 in order for us to head higher and set new 52-week highs. On the downside, it needs to hold 1220 for this current range to remain in tact.
Technical analysis is an interesting tool only because everyone seems to be using it. A month ago, investors were fixated by the S&P trading in a range of 1080 to 1180. It traded there for a while. Once it broke higher, a new range was established, at the 1190 to 1290 levels. That is the current fixation. It matters because all the “traders” will buy as long as the levels hold and they will sell if the support levels are broken. After the “Italian News” broke last week the S&P fell sharply, but still remained above the support lines at 1220 and as long as it remains there and does not suffer a close sharply below, the up trend is still intact.
Volatility is the second thing you should be keeping an eye on. You can do this via the Volatility Index or VIX. It stayed below 30 for a few days and almost broke through that key level of 25. Recall that just a few weeks ago it was approaching 50 – panic mode. Had you bought the market when it was in the 40s, you would be sitting on handsome profits today. Since then, volatility has fallen by 50% – that is a huge move. But, it’s still out there and the VIX over 30 is indicating that the markets are in for choppy trading. If the VIX moves below 25, the markets will appear relatively calm and the bull trend will be confirmed for the near term. At current levels we are still trending towards calmer markets. However, should the VIX close over 35 in the days ahead, look for a move back into the 40s and a market 10% to 15% below where it is today.
IN the coming days politics and the economic future of the US will converge as the Super Committee puts forth its proposals for deficit and debt reduction. If they fail to agree, the axe will fall on a lot of programs that the Republicans hold dear. It will also likely trigger talks of a further downgrade of US debt. That is less significant since the alternative is European debt! The markets and ratings agencies are looking for cuts in the $3 to $4 trillion range, but the Super Committee only has to deliver $1.2 trillion or so. They need to shoot higher and closer to what the market expects otherwise Santa will be delivering a lot of coal to the market in December.
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