Both US major indexes S&P 500 and Dow 30 clocked in gains for Friday. However, it is clear that not all gains are the same – S&P 500 closed 0.31% higher, while Dow 30 came in only marginally higher at 0.02%. The manner in which both indexes moved on Friday is also highly interesting, with Dow the more bullish one initially, pushing towards 15,500 during early trade, but collapsed quickly before noon, trading back towards 15,400 and finding support just under 15,420. Prices then quickly recovered towards the last hour of Friday’s session, closing at 15,454.30 and allowing bulls a small minute gain to show for. S&P was bearish initially, and traded mostly below Thursday’s record close for the 2 hour of trade. Price rallied sharply back above the record close, but wasn’t able to hold on, but instead slipped quickly lower back before midday – fairly similar to Dow 30 in this regard. However, following the midday low, prices traded steadily higher, before rallying much stronger than Dow 30 during the last stretch of Friday’s trading, allowing bulls to close above 1,680 for the first time.
After analyzing a play-by-play price action between these 2 indexes, we can see that both indexes are still highly correlated to each other, with broad rallies and sell-offs happening around the same period of time. However, the difference in sentiment between Dow 30 and S&P 500 is stark, as seen by the magnitude between rallies/sell-offs. It is clear that S&P 500 is more bullish compared to Dow 30. The reason for the disparity isn’t really obvious, as both indexes have recorded record closes. Nonetheless, with Q2 earnings season here, perhaps the robustness of S&P 500 can be attributed to a stronger belief in the underlying stock earnings, as opposed to Dow 30’s component stocks. Looking at broader trends, it is also worth noting that both indexes have been trading flat since Thursday, and if we take out Ben Bernanke’s bullish talks on Wed, it is reasonable to think that prices would have maintained horizontal if the event risk did not exist. This indicate to us that market is jittery and unwilling to commit while in wait for the Q2 earning results. This is huge considering that we are currently at record high levels, and the fact that bulls are not buying further to push for stronger highs is opens the door for a possibility of strong sell-offs should earnings disappoint. Unlike Q1, where earning misses failed to condemn individual stock prices, a miss this quarter could send prices sharply lower and perhaps even pull risk appetite broadly lower.
Dow 30 Hourly Chart
From a technical basis, Price is currently trading in the middle of the Channel. Stochastic readings looks to be pointing higher, but we could be simply seeing a temporary rally of the longer bearish cycle that happened on Friday. Hence, it is hard to determine whether price is heading towards Channel Top or Channel Bottom from here. Some may interpret that current price is part of the rebound effort from 15,400 – aiming for 15,500 top, but it is important to know that price did not really test 15,400 in any meaningful manner in the past 12 candles, and hence without price clearing the 15,450 level, it is difficult to simply dismiss the bear cycle as fully over.
S&P 500 Hourly Chart
S&P 500’s consolidation channel is tilting higher slightly, echoing the assertion above that S&P 500 is more bullish than Dow 30. With prices higher closer to Chanel Top, the possibility of a pullback is higher for S&P 500 compared to Dow 30. Given the strong correlation and Dow 30’s slightly more bearish nature, should S&P 500 rebound from the Channel, we could potentially see Dow 30 moving back towards its own Channel bottom. On the other hand, should a breakout occur in S&P 500, the likelihood for Dow 30 to move towards its Channel Top becomes higher.