US stocks slid lower yesterday, continuing the post FOMC decline that started on Thursday (not visible on daily stocks but clear via Futures). The overall bearishness of stocks has been attributed by increasing fears of Fed Tapering in October, which is not surprising as market participants are a forward looking bunch that will speculate on any event possible. What is more important perhaps is not that such sentiment exist, but rather that we have given up all the gains from last Wed’s FOMC outcome, and currently trading below the pre-FOMC levels. This is a good confirmation that market has already forgotten all the dovishness of everything Bernanke said last week, and instead focusing on the possibility of a tapering event in October.
It seems that market is firmly believing that a tapering event will be coming. If it’s not in October, it will be in December, or February etc. This feels exactly back in 2012 when market was expecting a QE3 announcement – no announcement in May? Nevermind, we’ll still push prices up in June and July etc. Hence if Fed wants to stabilize markets, the best course of action would be to actually announce a proper tapering timeline, so that bearish speculation will cease and proper long-term bulls coupled with US economic recovery will be able to take over from there. By continuing to keep market in the dark, even the hardcore bulls will be hard-pressed to go in strongly in fear of the initial bearish backlash should the Taper announcement happens.
S&P 500 Hourly Chart
From a technical perspective, 1,695 support will be key to keep overall bullish move intact. Should 1,695 be broken, we could see acceleration lower quickly towards the Channel Bottom. The most bearish scenario would see prices tagging Channel Bottom from here, rebounding higher but unable to breach 1,695. This would help to push Stochastic readings from Oversold back higher, providing more space for further bearish movement in the future. Should 1,695 holds, a rebound towards Channel Top is possible, but it is likely that immediate short-term pressure would remain bearish as long as prices hold below 1,700.
Dow 30 Hourly Chart
Dow 30 is reclaiming back the more bearish title from S&P 500, with prices already trading below last week’s low. The next level of support is the consolidation of 15,300 – 15,350 (not shown on chart) which will likely coincide with a potential break of current wedge as both upper and lower trendline converge. Stochastic readings suggest that momentum is oversold, but short-term momentum can remain highly overbought/oversold for an extended period of time if the trend is strong. Nonetheless, the most bearish scenario would be price breaking the 15,300 level coinciding with a wedge break to the downside followed by a pullback which fails to breach 15,300 – allowing Stochastic readings to move back higher for a future bearish push once again.
The slight difference in degree of bearishness can also help us gauge what’s the overall market sentiment. Should Dow 30 manage to climb back into the 15,480 – 15,580 consolidation zone, the likelihood of S&P 500 breaking 1,710 ceiling increase. Conversely, should S&P 500 breaks 1,695, the chances of Dow 30 breaking the wedge/15,300 improves.
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