US stocks hit record highs following Bernanke’s shocker. The Fed decision to hold off tapering measures yesterday was a bullish surprise for the markets, as a 10% taper scenario was already priced in based on analysts consensus estimate. However, it remains to be seen whether yesterday’s jump can translate into a longer term bull trend. First off, volume traded for US remains low – yesterday’s S&P 500 volume traded was the highest in a month, but the 568 million traded that contributed to yesterday’s rally is paltry compared to the beginning of the 2009 economic recovery where average daily volume was more than 1.5 billion, with the highest daily volume of 2.5 billion. The issue with new record highs being forged out without substantial volume set a few alarm bells ringing, and suggest that current rally isn’t supported – the precursor to a strong bearish reversal. That being said, this has not deterred Stock prices from moving higher since QE3 in 2012, but will nonetheless remain a monkey on stock prices back. Secondly, by delaying tapering this time round, the Fed will simply invite further speculation in the next 2 meetings in late October and mid December. This will undoubtedly weigh heavily on stock prices eventually, limiting growth prospects for prices. Lastly, yesterday’s S&P 500’s gain of 1.22% and Dow 30’s 0.95% are not spectacular, and perhaps a little bit underwhelming especially given the context of yesterday’s trade.
S&P 500 Hourly Chart
In terms of technicals, it is difficult to say where we are potentially headed as prices are within uncharted territory. Stochastic tells us that current rally may be Overbought, but that is not a confirmation that a down trend will be coming soon, if at all. Currently price is trading flat above 1,725 after pulling back from the highs of 1,730. A good bearish confirmation would be price trading below 1,725 with a stoch break of 80.0 concurrently. In terms of bullish continuation, we should ideally see price retesting 1,725 with Stoch levels rebounding higher after a slight dip, followed by a break of 1,730 previous swing high.
Dow 30 Hourly Chart
The same pattern is seen on Dow 30, and with prices similarly in unknown territory, we can only take directional cues by prices breaking the soft support of 15,670 or previous swing high of 15,715 in order to have a better grasp of whether there is bullish continuation or a bearish retracement. Stochastic will help to provide confirmation in the same way as S&P 500.
In the meantime, traders may wish to look at Asian and European stocks indices and see if traders from other regions are equally bullish. Currently we can see that Asian markets have been broadly higher ask risk appetite has spilled over, but this increment in risk appetite has failed to pull US Futures higher, adding to the suspicion that yesterday’s rally could really just be a one-time revaluation and not a new trend setter. But this verdict could be premature, and to be honest it will be presumptuous to assume that we know what the rest of the markets are thinking. Chances are the rest of the markets are also second guessing each other right now, and we could potentially see prices trading flat for a little while. Fundamentally, with Bernanke saying that firmer evidences for recovery is needed before a tapering action can occur, it is entirely likely that we may see good news becoming bad news again, where better than expected economic numbers actually drive Stock prices lower. What Bernanke has said may also increase market sensitivity to the next few economy news releases, especially those pertaining to Housing Market and Employment.
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