XJO Completes Retracement Of April 2011 Levels

The XJO has claimed our target of 4,969 today with a close a smidgen above, putting it at levels unseen since April 2011 before the Eurozone woes hit. This completes the full retracement - so the question is, where to now?

The scenario which comes into mind involves a dip back below 4,969 - on the previous four attempts at breaking through since December 2009, the XJO has failed on all occasions. This could involve a slight pullback to around 4,900, but it may also suggest a long term cup & handle formation, which we talked about last week. In this case, we may see the XJO power above 5,000. However with growing calls of the market levels being at overbought, we refuse to put strong confidence into this playing out. With headwinds growing in terms of the deterioration of the global macroeconomic picture, the US sequestration and Eurozone problems coming back into the forefront led by the upcoming Italian general election uncertainty, there may be less credence to this thought. We will have to see how things pan out in the coming weeks, and though we cannot refute the notion not clinging onto the uptrend, we would err on the side of a more market neutral stance, and flexibility to allow for quick unwinding of long positions.

The daily chart shows the next target for bulls would be the psychological 5,000 barrier, and then the highs of April 2010 at 5,025  thereafter. Beyond this would be the 5,177 mark reached in September 2008.

The weekly chart shows longer distance target of 5,408, the 61.8% retracement of all time highs. Whilst the price action will show 11 out of 12 advances, levels are approaching the upper bollinger band, which may trigger selling pressure as the XJO attempts to break 5,000. However, a bullish cross of the 50WMA & the 100WMA may prove to be important in preserving the current rally for now.