By Jim Donnelly, Olson Global Markets

With plenty of things to worry about both globally and domestically, the S&P 500 Index remains in a “tug-of-war” between buyers and sellers. On daily bar charts, the S&P 500 Index (SPX) has already broken below first key support at 1,315 and has staged a relatively contained correction. Without having yet tested key trend line support (currently at the 1,235 level), oversold conditions have developed on the daily time frame. This set-up suggests that a possible move back up toward trend line resistance now at 1,335 could unfold first.

Still, it is trend line support at 1,235 that should be the key test. That level, which sits only 109 points below the 1,344 the post-Lehman Brothers high set on February 18th, represents a very modest 8.1% correction by itself. To many, a correction of this size almost seems benign, particularly in light of a number of unknowns that have resulted from the recent jolt to the manufacturing sector in Japan, let alone a set of on-going conflicts in the middle-east.

It is worth pointing out that the technical picture on the S&P 500 Index is much murkier when looking at the price activity on the intermediate-term time frame. Technical “sell signals” have been triggered on weekly charts with overbought conditions still present. This is a concern that should be heeded if the 1,235 level were to give way to sellers. Such a breakdown could lead to a possible test of “cross” trend line support at 1,050, which would represent at a more troubling 22% retreat from the February high.

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