US stocks continue to climb yesterday, clocking in yet another triple digit gains for Dow despite the fact that Asian and European markets were less than wholly bullish. Price has broken higher from the ceiling of the sideways Channel discussed yesterday, forcing us to rethink the assertion which believes that current rally is merely a technical rebound and not fundamentally driven by easing of Fed’s tapering fears. According the previous assertion, price should be finding strong resistances and bouncing lower especially given the mixed global sentiment on stocks. By being able to break above the Channel for both S&P 500 and Dow 30, the rally appears to be made up of sterner stuff, which puts forward the case that traders are pricing in a dovish FOMC today which contributed to this rally.
This implies that even in the event of a dovish Ben Bernanke’s speech today, the reaction would be less muted with market already pricing in the scenario earlier. Of course this doesn’t mean that there wouldn’t be a positive reaction at all, but rather we need to ask ourselves what is the percentage of market that has already discounted such a scenario, considering that stock prices have just rallied significantly from a 13th Jun low. This increase the possibility for a “Buy the Rumor, Sell the News” outcome, and should Ben Bernanke surprise market by even outlining any potential exit plans for QE, market seeking dovish signals may be highly disappointed, with the likelihood of a sharp decline increasing.
Dow 30 Hourly Chart
Looking purely at technicals, Dow 30 is currently on a strong uptrend with 15,300 broken. Futures prices are trading slightly lower despite a stronger Asian market (which is led by the bullish US stocks). The decline is not surprising and can be construed as a mere technical rebound if 15,300 ultimately holds. The rising trendline is still in play and likely to provide rebound/support if price maintain current levels during US trading session. Stochastic readings suggest that a new bear cycle may be in play soon with both Stoch/Signal line pushing towards 80.0. However a proper bear signal may only emerge if both lines break below 80.0, which is likely to correspond with price pushing below 15,300 and the rising trendline. However given current rally, it is possible that Stoch indicator may be able to form an interim trough within the Overbought region, similar to what we’ve seen on 15th June, which is in line with a successful holding of 15,300 from current bearish test.
S&P 500 Hourly Chart
The same could be said about S&P 500 with Stoch indicator exhibiting the same characteristics. However, unlike Dow 30, price is currently under the rising trendline, which suggest that any sharp rallies from here may be capped. This may not be a primary concern right now considering that a sharp rally is not high on the radar given the analysis above. The level to watch for S&P 500 would be 1,647 – 1,650, and follows similar analysis to Dow 30’s 15,300.
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