Well that was embarrassing. Yesterday it was mentioned that clearing 1,650 on the S&P 500 should ideally set up price for a strong bullish breakthrough. We’ve even went further and say that the bullish sentiment during Asian hours should set prices up higher, and potentially allowing price to survive a bearish FOMC minutes (which was expected to be more hawkish considering that Bernanke did mention about the QE tapers then) and remain bullish above 1,650. Unfortunately, things did not pan out this way – the late Asian sell-off followed by risk aversion during European hours saw bulls already under pressure even before the minutes were released. Nonetheless price was still able to hold tight, with S&P 500 trading above 1,645 and Dow 30 15,250.
Under our previous assessment, this would be the worst scenario for bulls to enter into the FOMC minutes event risk. Trading under 1,650 for S&P 500 has already impaired the bullish momentum, and should FOMC minutes proved to be bearish, we could see the resulting decline acting as a confirmation for the bearish rejection of 1,650 – paving the way for a stronger bearish reversal back towards 1,600 for S&P and 15,000 for Dow. Thankfully, 2 wrongs do make one right in this case, and we were utterly wrong about the FOMC minutes. Turned out the minutes reflected many voting members wanting to see further improvements in job market before embarking on the tapering road. Ben Bernanke himself said that continued easing is necessary, and even stated that current unemployment rates are “overstating” the strength of the economy. This is a totally different Ben Bernanke compared to the one that we’ve seen last month, and market flew higher following that. However, a large part of the rally happened after stock markets have closed, resulting in the actual S&P 500 index closing 0.02% higher and Dow 30 actually marginally lower at 0.06%. The gains were only observable via Futures, and both indexes have stabilized as Asian market opened.
S&P 500 Hourly Chart
The stabilization of price during Asian hours is not surprising considering that sentiment of Asian stocks are mixed currently. It is likely that price will be more affected by risk sentiment in Asia and Europe now due to the fact that prices rallied during Off-Market hours, and traders have very little idea what may be the “proper interpretation” of Bernanke’s speech until US market open once again. Hence US Futures traders will most likely take cues from Asia and Europe for further guidance. Given that Asian stocks aren’t exactly clear in terms of direction, even more eyes will be on Europe and their interpretation. This would imply that we could see strong potential direction in US Futures in a few hours time when Europe open. Unless Europe turned out to be indecisive as well.
From a technical perspective, Price is certainly in a strong up trend, and the latest rally allowed price to break the middle of the 3 rising trendlines that attempt to typify this current rally. It is possible that price may find support from the aforementioned trendline in the next few hours even if price maintains current levels. This is in line with the assertion above which suggest that price may rally during European hours if risk appetite grow due to a positive interpretation of Bernanke. The opposite is true as well, as a bearish read by the Europeans would most likely result in lower US Future prices, which will be represented via a break of the trendline.
Stochastic readings favor a downside scenario, with Stoch readings deeply Overbought and looking likely to cross the Signal line. However, even if that happens, a bearish cycle signal is not yet formed, which does not negate current bullish momentum.
Dow 30 Hourly Chart
Dow 30 is a tad more bearish, with price currently facing resistance from the lower rising trendline. This increases the likelihood of the trendline holding, and a rebound lower becomes more likely.
Ultimately, it is important to note that all the short-term technical interpretation may give way to the risk trends during European session. As such, do be prepared that “unreasonable” technical moves may emerge. Should Europe remain indecisive just like Asian markets, then perhaps that is where we may see technicals shine – which in this case for both S&P 500 and Dow 30, a short-term pullback may be in order after such a strong rally.
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