US stocks broke a 3-day decline on the back of better than expected economic data. Advance Retail Sales for May came in at 0.6%, beating estimates of 0.4% and much stronger than April’s 0.1%. Weekly Jobless claims figures have also fallen slightly from 346K to 334K for the week of 8th June, while Continuing Claims (week of 1st Jun) came in 5k lower than the expected 2,978K. The stronger data coupled with technical rebound allowed both stock indices to clock in higher than 1% gains yesterday.
S&P 500 Daily Chart
This gain is technically significant for S&P 500 as it prevented a bearish breakout scenario that was looking likely to happen yesterday. With the rebound of Channel Bottom, price will be able to seek out Channel Top especially if 1,650 is broken, which will open up a possibility for price to challenge 2013 highs once more as the rally from Jan 2013 will remain intact. Failure to breach 1,650 will affirm the decline from May 23rd which will make Channel Bottom susceptible to yet another test perhaps in the next 1 or 2 weeks. Stochastic readings show the same tentativeness about current rebound – readings are pointing higher but still below the stoch line. Similar to price which will need to clear 1,650 to prove its bullish intent, Stoch readings need to clear above the recent peak just around 56.0 in order to signal a strong bullish cycle.
Dow Jones Index Daily Chart
Dow Jones enjoyed similar good fortunes, with yesterday’s rally preventing price from breaking the mufti-month trendline. With shape of DJI fairly similar to S&P 500, the interpretation of price action remains the same – Bulls will need to clear the 15,250 – 15,300 recent swing high to eliminate current bearishness.
Fundamentally, we need to question whether current rally is sustainable. To do that we need to first understand why price fell from May to begin with. Many fingers are pointing at rumors surrounding Fed’s tapering action of QE3, which is rumored to start in 2013. Another possible reason could simply be that price is facing a broader technical rebound after a long extended rally since Jan. Regarding Fed’s action, Bernanke is expected to continue singing the tune of a Dove, and affirming market that QE3 is going to continue “for an extended period of time” or “until signs of recovery are certain”. Hence it is likely that the rumors of Fed tapering may be oversold at this point. The threat of Fed’s tapering action is real though, but the likelihood of it happening AFTER Bernanke ends his term in Jan 2014 is higher than right now.
If the main reason for decline from May is due to a technical rebound, then bulls will have even less to fear, as the affirmation of the multi-month trendline/channel for both S&P 500 and DJI suggest that the technical rebound may be over, which will put current strong bullish momentum back on track, suggesting that the rally may have good follow-through. With continued stronger US economic data coming out, it seems that bulls will be in a good position moving forward.