Business Blog Posts

A data-heavy week could give investors hard evidence to justify a rally that lifted the S&P 500 16.8 percent from its August 31 close to the 2010 closing high hit last week.

But the index has been unable to move above 1,228, a key resistance level, and its chart is brewing a double-top formation, a very bearish signal.

"We're susceptible to a pullback if we don't get any clarity on fiscal policy and if any of this economic data disappoints next week," said John Lynch, chief equity strategist at Wells Fargo Funds Management in Charlotte, North Carolina.

"I would think you're going to see some, not all, smart money pull their investment (out of stocks) the closer we get to 1,228. These guys recognize we still have above 9 percent unemployment, sovereign credit risks, a consumer deleveraging and no clarity as to what businesses should do with their cash."

For the week, the Dow Jones industrial average .DJI and the Standard & Poor's 500 index .SPX each fell 2.2 percent. The Nasdaq Composite index .IXIC lost 2.4 percent.

The S&P 500 brushed the 61.8 percent retracement of its slide from the historic highs in 2007 to the low in March 2009.

This was the second time the index backed away from the 1,228 area and its chart could be drawing a bearish "double top" formation. The last retreat from that level, in April, was the start of a correction that took the S&P to its 2010 low in July.

The S&P 500 dipped on Friday below its 20-day moving average for the first time since September 1 but managed to close above it in a sign that that level, currently just above 1,194, could provide strong technical support.

LET'S TALK ABOUT TAXES

Investors will closely watch a meeting next Thursday between U.S. President Barack Obama and congressional leaders to discuss policy, including tax cuts.

Republicans will take control of the House of Representatives starting in January following their strong gains in the November 2 elections. They have vowed to force a full extension of all tax cuts enacted during the administration of President George W. Bush. Otherwise, the tax cuts expire at the end of 2010.

Most of Obama's Democrats favor extending tax cuts only for the first $200,000 of income of individuals and $250,000 for families.

"Bush tax cuts are very important for the market," said Michael Yoshikami, president and chief investment strategist at YCMNET Advisors in Walnut Creek, California.

"If they're not renewed, that could cost 0.75 percentage point per year in GDP (growth). I don't think any other proposal would have that kind of significant impact. If dividend taxes were raised, that would be a still important but more minor issue," he said.