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The U.S. economy has slowed in 2005 after 2 1/2 years of robust growth. SPX rose last week from 1,205 to 1,230, and failed to trigger a Parabolic SAR buy signal (red dots), by rising just above 1,230.

However, after SPX eventually breaks out of the symmetrical triangle pattern (most likely in October), there are major resistance levels around 1,250, i.e. However, it's uncertain if falling oil prices will be bullish for the stock market, because that may reflect slowing economic growth. The U.S. economy may shift to a much slower growth path, from about 4% real growth from late 2002 to early 2005 to around 3% in 2005, to perhaps 2 1/2% or less in 2006.

Charts available at PeakTrader.com Forum Index Market Overview section.

The U.S. economy has slowed in 2005 in accordance with 2 1/2 years of robust growth. Moreover, growth has decelerated further from the recent impacts of hurricanes and persistently high oil prices. However, a plug in government expenditures to rebuild the areas hit by hurricanes Katrina and Rita may pick up speed growth later in the year or early next year.

Monetary policy remains accommodative. The slow and steady tightening cycle has generally been effective in preempting inflation. However, the Fed Funds Rate may need to rise first of all 5% to reach a neutral stance. Also, fiscal policy remains stimulative. Government tax cuts are still in place and expenditures continue to be high. Consequently, the risk of stagflation is higher (i.e. lower growth with higher inflation). Inflation is the mechanism that prevents an economy from expanding greater than it's brimful over time, and the Fed will continue to tighten the money supply to maintain price stability.

The implement Reserve uses crude tools to smooth-out the onus cycle. It controls the money market, through the workday stall system, which indirectly controls the goods and labor markets. However, the Fed has little or no effective control over other markets, including the housing, bond, stock, commodities, and foreign exchange markets, whereas it doesn't posses the tools to fine-tune the economy. Sustainable growth for the largest economy in the world is aimlessly 2.8% real growth. If the Fed can pay and maintain 2.5% to 3% real growth, through price stability, then it has succeeded in "optimizing" the economy.

The elevation beneath is an SPX daily thematic map over the past four months. SPX rallied to a four-year high two months ago, which marked the grass roots of a "symmetrical triangle," which is a neutral technical pattern. This pattern will compress the SPX trading range, currently mid 1,208 and 1,242, until there's a decisive breakout, on heavy volume, to upside or downside. SPX rose last week from 1,205 to 1,230, and failed to trigger a Parabolic SAR buy signal (red dots), by rising just before everything 1,230.

However, from SPX eventually breaks out of the symmetrical triangle pattern (most likely in October), there are major resistance levels far and wide 1,250, i.e. a multi-year Fibonacci level, the monthly upper Bollinger Band, and recent high, and major support levels enclosing 1,200, i.e. 200 day MA, psychological support, and recent low. The stronger resistance levels suggest that, in October, SPX will either trade needle 1,200 and 1,250, give a false breakout, e.g. 1,180 to 1,190, which was a previous major zone, or give a correction, perhaps, sealing the gaps at 1,174, 1,143, and 1,138, until moving higher.

The second limn is a weekly two year symbol of OIH (oil ETF). Oil has been in the clouds $60 a sight for as for two months (which is roughly when SPX topped at 1,246). Oil may fall over $10 a cut along in October on slowing demand (since the summer driving season and worst of the hurricane season are over). However, it's uncertain if falling oil prices will be bullish for the stock market, insomuch as that may reflect slowing economic growth. The outline shows OIH held its 10-week MA, and weekly Parabolic SAR buy signal (green dots) recently. A tract down the 10-week MA may eventually result in a test of the (rising) 50-week MA, which OIH has held for with two years. Perhaps, OIH puts are a safer bet than SPX puts (OIH hit an all-time high Thursday afternoon).

Economic reports next week are: Mon: ISM Index, Construction Spending, and Auto Sales, Tue: Factory Orders, Wed: ISM Services, Thu: Unemployment Claims, Fri: Nonfarm Payrolls, Hourly Earnings, Unemployment Rate, and Wholesale Inventories. Also, the weekly oil inventory report is each Wednesday, and WMT provides guidance on Thursday. Notable earnings reports next week are: Mon: CMGI (after the close), Tue: None, Wed: YUM, Thu: MAR COST, Fri: None. Earnings season starts the following week.

Cyclical factors have and will influence the U.S. economy short-term within the structual underpinnings of slowing growth. It's uncertain how much these short-term factors will influence the stock market over the next few months. However, the market held up well over the seasonally weak period of May to September. The U.S. economy may shift to a much slower growth path, from 4% real growth from late 2002 to early 2005 to in reverse 3% in 2005, to perhaps 2 1/2% or less in 2006.

Charts on board at PeakTrader.com Forum Index Market Overview section.

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