April 2 2009 5:58 PM EDT

S&P 500 technical analysis and Q1 earnings season

Charles Kirk pointed out on Tuesday, March 24th a piece that Birinyi released about previous S&P 10-day +21% moves. The first part of the current rally qualifies and the 10th day is March 23rd. The study produced four other instances, all in the 1930's. So far the rally from SPX 676.53 is looking similar to those other instances. After upticking 21% in 10 days, on average the market increased 15% more in the next month and 20% more in 3 months. If the SPX becomes a mirror image of the average, it will move to 941 by Thursday, April 23rd. This isn't a prediction...just a comparison.

T-Theory T

The latest analysis from Terry Laundry indicates there is a bull cycle (a "T") until the end of May. In his methodology, a bull cycle can "collapse" in a bear market which is what has been happening lately, and in this case he falls back on oscillator and volatility analysis. The top of the volatility channel he's using is in the high 800's.

Seasonality

Stock Trader's Almanac reports the top five months since 1950 in the S&P are November +1.7%, December +1.7%, April +1.4%, January +1.3%, and March +1.0%. Two of these months are March and April, so arguably we are in 2nd strongest period of the year until May.

Earnings

While unknown information is usually bad for market sentiment, the fact that Q4 earnings were crazier than a sack full of weasels allowed the market to rally on the conclusion of Q4's earnings season. Q1's potential for fewer writedowns was all investors needed to start making positive assumptions about the future. Additionally, the worst earnings are reported late in the season or mid to late May. This means whatever the number is at the end of April, expect it to go down. S&P uses estimates plus to-the-date releases to calculate a full number as the season progresses, so this spreadsheet (first search result) will be extremely useful in the coming weeks.

Conclusion

Depending on who decides to enter the market, there could still be strength from SPX 840. However, at this point in the rally (+26%) it is time to start preparing for a condition where stocks are too far ahead of economic trends that will not be reversing as quickly. For the market to continue higher earnings need to at least be in line with S&P projections of $13/share for Q1. If that is not the case, another dose of doubt based on bankruptcies or unemployment could overtake the optimism.