The Fed’s FOMC statement yesterday revealed that current QE Infinity target of $85 Billion purchases a month is still ongoing, while remaining silent on future pace of purchases. This isn’t surprising, as nobody expected the tapering of QE to start this round, with most Fed watchers gunning for a September taper to begin with. However, yesterday’s statement was slightly more dovish than before, hinting that the September event may be less likely. The FOMC statement described the US economy as “modest”, a downgrade from previous month’s “moderate”. There are also concerns voiced out by voting members that inflation has been persistently below the 2% target, and suggest that any tapering efforts right now will pose risks for the fledgling recovery.
The slight suggestion that a tapering decision in September will not happen sent stock prices soaring. However, it wasn’t an easy ride, with prices actually dipping lower when the initial statement was released. Furthermore, it seems that bullish follow-through was extremely weak, with Dow 30 unable to even test the earlier session highs. Furthermore, prices retraced the gains quickly, and we’re basically back to pre FOMC announcement levels towards the end of the US session.
The reason for the lack of bullish showing can be attributed to the fact that forward guidance by FOMC is still hawkish. In the statement, FOMC stated that economic growth will “pick up from its recent pace”, which can be viewed as an upgrade from previous month’s “moderate pace” wording. Suggesting that a taper may still be installed in the future, but perhaps not really immediate. However, traders being a forward looking bunch, may still consider selling right now considering that the likelihood of a QE tapering happening in the future has increased.
After the all the dust have settled, S&P 500 closed at -0.01%, while Dow 30 suffered a larger impact, closing 0.14% lower. Looking at global sentiment yesterday, we’re undoubtedly bearish with Nikkei 225 closing lower and European bourses gaping lower on open. US indexes was having none of that, gaping higher on open instead, and traded higher on the get go. Hence the question on whether sentiment is bullish or bearish becomes that much harder to answer. On one hand, US stocks were showing good bullish signs, but on the other, the bearish reaction to a debatable FOMC statement suggest that market may be leaning a little to the bearish side.
Dow 30 Hourly Chart
Or perhaps the question may not even be valid to begin with. From a technical perspective, price is trading nicely within a sideways range from 15,400 – 15,600. A narrower range can be found between 15,470 – 15,550. The overall fundamental sentiment may still remain the same – e.g. mildly bullish supporting price action which was observed back on Monday. Hence the decline above 15,550 can simply be explained away as technical bears seeking to drive price down back towards 15,470 once more, and not truly due to any shift in sentiment. Furthermore, the fact that price is holding nicely above 15,510 this time round lends credence to the above assertion that the mildly bullish sentiment remains in play.
S&P 500 Hourly Chart
The same can be said for S&P 500, with resistance band spanning from 1,690 – 1,700. However, price appears to be more bullish from here, with the 1,690 round figure already broken during early Asian hour, most likely influenced by the resurgence of Nikkei 225 this morning. However, looking at the post FOMC decision price action, we could already tell that S&P 500 has a stronger bullish disposition compared to the Dow 30 counterpart, as price did manage to overcome the earlier session high.
As the market is less than clear in terms of directionality, it may be helpful to look at different indexes for different indication. Should S&P 500 dip below 1,590 and preferably below 1,688, this would be an indication that strong bearish winds are blowing. Conversely, clearing 15,570 for Dow 30 would do the same for bulls.
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