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[arthur]

A multi-year level is a strong level. SPX is making its third attempt to hold multi-year resistance in the low 1,250s. However, the next few weeks may be volatile, because of the FOMC announcement Tuesday, earnings warning season in late September, end-of-the-quarter "window dressing," new money at beginning of quarter, and earnings reports in October.

The SPX daily and monthly charts below show major resistance between the mid 1,240s and mid 1,250s, i.e. the two previous four-year highs at 1,246 and 1,243, the 61.8% Fibonacci level (or 38.2% retracement) from the 2000 peak to the 2002 trough at 1,253, and the monthly upper Bollinger Band at 1,251.

There's more uncertainty about the FOMC meeting Tuesday than other recent meetings, because of hurricane Katrina's impact on the economy. It's uncertain if the FOMC will pause, until new economic data reveal the effects of hurricane Katrina, or if it will continue to tighten at a "measured" pace (of small increments).

NYSE volume has been heavy recently, which is typically bullish. Volume was particularly heavy on Friday, because of end-of-the-quarter expiration of futures and options (quadruple-witching). The heavy volume, on the NYSE, suggests SPX may rise into the 1,250s within a few weeks.

Nonetheless, longer-term, there are strong bearish indicators. The SPX to U.S. Dollar ratio is near an all-time high, which suggests SPX will fall and the dollar will rise (since there's an inverse relationship). Moreover, the Utility and Transport Indices to VIX ratios had parabolic rises over the past two years, and they're currently back to near their all-time highs. Furthermore, large cap to small cap ratios are near all-time lows indicating large institutions are not convinced that the cyclical bull market will continue.

The U.S. economy is slowing after 2 1/2 years of above trend (and unsustainable) growth. U.S. real growth will slow from 4% in 2004 to about 3 1/2% in 2005. I suspect, the U.S. economic expansion will slow further to below 3% in 2006. However, there's a negative correlation between employment and earnings. Hurricane Katrina slowed employment growth. So, it seems, the market is betting earnings growth will pick-up, at least short-term.

Oil prices fell from about $71 a barrel three weeks ago to just over $63 Friday. However, OIH (a basket of oil stocks) fell from about $122 a share three weeks ago to only $119.50 Friday. Gasoline prices fell greater than heating oil prices. Energy stocks are about 15% of SPX's market capitalization, which is one reason why SPX remains high.

It's uncertain how next week will play-out. However, if SPX rises into the low 1,240s Monday morning, it may pullback to the mid 1,230s, and then rise into the low 1,240s again before the FOMC announcement Tuesday afternoon. If SPX falls Monday morning, to the low 1,230s, it may rise into Tuesday. However, it's uncertain how much the unwinding of options Friday skewed direction.

If the FOMC pauses, that may initially be bullish, and then bearish, because large institutions will be skeptical. If the FOMC tightens, that may initially be bearish, and then somewhat bullish, although the market will enter earnings warning season (preannouncements) next week. Normally, the true market trend takes place within two or three days after an FOMC announcement.

The market dislikes uncertainty. So, Monday may be particularly volatile. However, I expect most of next week to be volatile. There may be opportunities to make gains with OEX calls and SPX puts early next week. However, later in the week, it may be best to focus on a few top individual stocks, e.g. long-term buys.