At the fourth time of asking, US stocks finally gained in 2014 with S&P 500 climb 0.61% yesterday. Is this a sign that bullish market sentiment is shifting back? With January Effect supposedly in play, prices should have a statistical advantage to be trading higher by the end of January, so is this the start of the climb?
Looking at price action, the answer is no. Or rather, we should say that there is no evidence that market is turning bullish. Even though prices did manage to climb higher than the recent 2 swing highs, we are still far away from Jan opening levels. Also, we are unable to hold onto gains, with prices starting to climb lower after hitting the resistance band marked out by the previous 2 swing highs. Stochastic readings also favor a bearish push in the immediate short-term with a bearish cycle currently going under way.
The slight bullish comfort price will be able to find is the rising trendline that has been in play since the bullish push after yesterday’s low. However, this trendline is not expected to provide significant support and may only serve to provide reference that bullish momentum is fully reversed should price ever trades below it, potentially opening up a bearish acceleration towards the support band marked out by previous 2 swing lows.
Traders should also note that yesterday’s rally occurred without any bullish economic news from the US front, with the only news release being a slight improvement in Nov US Trade Balance which is not heavily followed as far as stock prices go. Risk appetite was definitely high though, with stronger than expected Retail Sales and Unemployment Change from Germany. This did have a bullish impact on S&P 500 Futures during European hours, but we need to acknowledge that prices were already on its way up during Asian hours. Hence, it would be reasonable to say that yesterday’s rally wasn’t fundamentally supported, and the implications would be that the rebound may simply be a technical pullback and not a shift in sentiment.
Price action on the Weekly Chart is literally begging for a bearish pullback which has not been found in 2013. Yes prices did move lower in various juncture but all in all bulls were totally in vogue with higher highs and higher lows for the entirety of 2013. We’ve not seen one significant pullback that has dented bullish momentum, and a strong bearish move in the future is definitely in the cards. That being said, there is no evidence that such bearish pullback is happening right now. Preferably price should break back into the Channel in conjunction with a bearish signal from Stochastic in order to ascertain strong bearish conviction amidst current strong bullish momentum.
Today’s FOMC meeting minutes may send prices wildly, but it is unlikely that this minutes will result in any significant shift in sentiment. The first QE Taper has already been done, and we know that more will be coming. Also, with a change in leadership, the significance of the previous meeting chaired by Bernanke may have little bearing on future meetings. Traders may wish to pay more attention to this Friday’s Non-Farm Payroll report. Keep an eye on post release price action, especially the direction after the dust have settled as that will give us a glimpse of what market is thinking and how they will react to future tapering and positive economic developments.
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