Is this the bearish pullback that we were waiting for? The risk of a bearish pullback has been high in recent days as we’ve not seen any significant move ever since prices rebounded from 1,740 support. With some weakness seen in US stocks on Tuesday, there was a chance that bears will make the critical breakthrough yesterday and they have delivered. However, it should be mentioned that the chance wasn’t incredibly high, and in our own analysis yesterday it was also mentioned that price may still yet stay within the consolidation band seen on Monday and Tuesday especially if broad risk appetite remain bullish.
Case in point, S&P 500 prices actually started pushing higher during early US session even though we have yet more bearish economic news coming out from the States. Building Permits for the month of Jan came in at 937K, lower than the 975K expectations and 991K previous. The miss on Housing Starts number is even greater – 880K actual vs 950K consensus estimate and 1048K previous. Producer Price Index Ex Food & Energy gained 0.2% vs 0.1% forecast on a M/M basis, but was below estimate on a Y/Y basis at 1.3% vs 1.4%. It is hard to see why S&P 500 should be trading higher when the numbers were released other than the fact that price was simply rebounding higher from the consolidation floor – underlining the strong bullish pressure that had allowed US stocks to keep climbing in the past 2 weeks.
What is more interesting is the fact that Stock prices started climbing lower before New York midday without any warning. As there wasn’t any economic news releases during the start of the decline, the only reasonable reason would be bearish technical pressure from the consolidation ceiling pressing down. Prices actually stabilized when minutes from the latest FOMC was made public and traded slightly higher for a bit before the downtrend continued. It is debatable whether stock prices went lower because of the minutes revelation or in spite of it, but this is not truly important as bearish momentum is definitely strong with consolidation floor broken.
Luck also play a huge part as well, as price has started to recover and seems likely to test the aforementioned support turned resistance until weaker than expected HSBC/Markit Mfg PMI drove risk appetite weaker across the board which drove S&P 500 prices to the 1,821 support. This is certainly good for bears who are already holding short positions, but for sidelined bears this may be tricky for them to sell into as the bearish news reaction short-circuited the resistance test process and we are not able to see a proper confirmation of the bearish sentiment. Also, after such a sharp decline some form of bullish correction is due, a point agreed by Stochastic indicator which is highly oversold right now. As such, it is likely for price to rebound higher and we may need yet another test around 1,829.5 which is also the confluence with the ceiling on 14th Feb to confirm bearish conviction.
However, it is entirely possible that price may simply trade lower as well, as such traders need to weigh whether to sell now and risk a rebound or sell later and potentially miss the trade altogether. Another potential way to trade would be to wait for a break of 1,821, but that may be difficult as well because the next significant level of support is nearby at 1,812.5. Given that we will need further confirmation for the 1,821 break, the potential gain after confirmation may be extremely limited, which makes waiting for a S/T breakout play less profitable, and traders who want more gains will need to be more aggressive – bringing us back to the original conundrum.
Does that mean that traders may have missed the short-term move? Potentially yes. But given that we’re still awaiting a long-term bearish correction, conservative traders will be able to find another opportunity in the future, patience may make you lose the battle today but you will have a higher likelihood to win a long-drawn out war.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.