US market traded higher on Monday with Dow Jones Industrial index clocking in another triple-digit gain (+0.73%). Underlining the strong bullish undertone in DJI after the brief foray below 15,000 last week. This increase is not limited to DJI only, with S&P 500 coming in with a slightly more impressive 0.76% gain. Analysts believe that the gain was spurred by speculators believing Wed’s FOMC meeting outcome will be a dovish one – which would mean continued QE3 purchases for the foreseeable future, which is good for stocks. However, it was not too long ago that traders and speculators got cold feet and sold stocks aggressively, which was what sent DJI below 15,000 to begin with. The culprit – rumors of Fed tapering QE3 during the upcoming FOMC meeting. If the analysts are correct, this means that speculators have suddenly became paranoid and then suddenly gained back confidence in a dovish Bernanke all within the span of 1 – 1.5 weeks. We know that market sentiment is always jittery, but even this is too extreme.
Hence perhaps there is a better explanation – looking at price range from 1st Jun to date, US stock indices have been trading sideways: DJI between 14,850 – 15,300 while S&P from just under 1,600 to 1,650. We’ve seen the formation of a horizontal channel with price bouncing off both floor and ceiling once before the Jun 13th rally. Looking back even further, we can ascertain that price is a huge step below from May 22nd/23rd highs, a resultant of the Fed tapering rumors. Current price range, though wide, is more of a reflection of uncertainty of the market as the Fed decision nears. Uncertainty tends to result in sideways trends with Support/Resistance lines holding – a goldmine for swing traders – which is what has been observed for the past 2 weeks in June. This seems a more palatable explanation for current price action, as opposed to simply assuming that traders are being bipolar week on week – which could still be true.
The implication of above assertion is that the wide channel is a sign of strong uncertainty, showing that Wed’s decision has the possibility of sending price greatly in either direction depending on the result. This is true even from a technical perspective, as a wide channel breakout can result in a even stronger follow-through especially after confirmation, hence upping the ante for Wed’s event.
S&P 500 Hourly Chart
This would also mean that current resistance ceiling for S&P 500 will have a higher likelihood to hold. This is despite the fact that price has rebounded from the Kumo with a bullish Kumo still in play. We are also trading above the interim ceiling of around 1,539, but that will need to be discounted with the Sideways Channel overall outlook which is further aided by the breaking of the rising trendline which represents 13th June recovery and a bearish Stochastic reading outlook.
Dow 30 Hourly Chart
The same applies for Dow Jones Index, despite price trading below the interim ceiling of around 15,210 but above the rising trendline – the opposite of what S&P 500 is experiencing. Nonetheless, the Sideways Channel outlook also applies here with stochastic readings similarly looking bearish. Price may be able to accelerate lower should the rising trendline be broken, but expect further support in the form of the 15,160 level and the rising Kumo.
With Asian stocks trading lower today, the assertion that current US 5 day rally is a rebound move off Channel bottom and not fundamentally driven (read: Fed dovishness play) can be truly tested. If US stocks go against broad risk trends and Channel Ceiling to trade higher, it will put a huge dent on the entire assertion, and the risk on Wed would be more of a “buy the rumor, sell the news” situation.