The S&P futures continue to creep further away from our uptrend lines as the bulls fight to avoid a retest of 900. The further our uptrend lines drift away, the more likely we are to see a sizeable pullback. On a positive note, buyers were able to keep the S&P at a reasonable level despite a report showing a decline in consumer prices in addition to Standard and Poors slashing its ratings on 22 U. S. banks. While considerable hope remains that the U. S. economy is on the path to recovery, investors can’t ignore that equities have made an incredible run thus far this year.

Therefore, the question becomes whether U. S. equities are trading at fair value. We believe the impact of the economic crisis on future corporate earnings hasn’t been fully realized. As a result, investors may be pricing in a recovery based on historical precedents rather than reality. Hence, the debate among investors continues, creating the relatively narrow trading range we’ve witnessed over the past 10 weeks.

Meanwhile, the 900 area should prove to be a worthy battle ground. Investors should keep an eye on the S&P’s interaction with our newly formed 2nd tier downtrend line along with our 1st tier downtrend line. Any decline beneath our 1st tier downtrend line could result in considerable losses. Luckily for bulls, today’s Philly manufacturing index came in well above analyst expectations, reinforcing the viability of an economic recovery.

Indicator wise, all of the S&P’s correlations are recovering or consolidating while maintaining their near-term downward pressure. The correlations show investors are considering sending U. S. equities into another leg down, yet investors aren’t ready to commit since a medium-term uptrend is in play. However, inflection points are approaching in both the EUR/USD and GBP/USD while gold trades just above important uptrend lines. Hence, even though the market may choose to consolidate over the immediate term, it seems a breakout point is approaching. Therefore, investors shouldn’t get too comfortable since we believe volatility could pick up shortly.

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