US stocks enjoyed modest gains yesterday; S&P 500 gained 0.42% while Dow 30 climbed 0.16% higher. That doesn’t look like a bad day all in all, but if we look closer at price action, yesterday was undoubtedly bearish. Prices actually traded significantly lower from opening levels, reversing the gains made during off-market hours (reflected in electronic Futures trading) due to yesterday’s strong risk appetite.
What caused the decline yesterday then? Economic numbers released yesterday were mostly positive. ISM Manufacturing came in at 55.7 vs 54 expected, and stronger than July’s 55.4. Construction Spending has also increased M/M by 0.6%, higher than the 0.4% expected. The only disappointment yesterday was Markit PMI (Final) which came in lower than the original estimate, however that is surely not the reason for the huge sell-off, as stocks did rallied higher during the first 2 hours of trade, indicating that market is focusing more on the more important ISM Manufacturing number instead.
It seems that the huge decline is actually due to reports of US House Speaker Boehner and Majority Leader Eric Cantor supporting Obama in his bid to get a favorable vote for military action against Syria. Although no US president has been rejected by Congress before, the same was to be said of UK until the latest parliamentary vote last week. Hence it is certainly no walk in the park for Obama this time round, and having Republican leaders fighting with him increases the odds of him passing through Congress. Nobody likes war, except war merchants and perhaps commodities traders, and it is not surprising to see stock market pushing lower following the reports.
S&P 500 Hourly Chart
It is highly likely that technicals played a huge role as well. Considering that 1,650 significant resistance held out despite better fundamentals with strong risk sentiment (Asian and European Stocks were mostly higher), it is not unreasonable to think that prices were already having a per-disposition to trade lower. The Syrian affair was simply a reason for bears to sell into strongly. Furthermore, the largest decline happened in-conjunction with a break of support 1,646, suggesting that prices may not have reached this low if not for the help of bearish breakout traders.
Currently, price is staying under the 1,640 round figure – another soft resistance in its own right. Noting that prices was already technically bearish to begin with reduces the likelihood of a 1,640 break. Instead, pressure remains on the downside and we could still yet see another test of the rising trendline just below. Stochastic readings are technically in a bullish cycle, but readings are currently pointing lower with current levels just around a “resistance” level with troughs seen. As such, it will not be surprising to see Stoch curve potentially peaking here. Nonetheless, if stochastic readings manage to break the 50 mark, with price breaking the 1,640 level, a push back towards 1,650 becomes open.
Dow 30 Hourly Chart
The same could be said for Dow 30 with its own Stoch “resistance” and price resistance. However, as Dow 30 has been the more bearish one, price has declined more from the recent swing high, resulting in current levels being much closer to the ultimate support compared to S&P 500 (ultimate support at 1,630). We could use this to our advantage though – should S&P 500 breaks the ascending trendline, the likelihood of Dow 30 breaking 14,760 increases . On the flip side, should Dow 30 breaks 14,850, the ability for S&P 500 to reach 1,650 becomes higher.
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.