S&P 500 and Dow 30 – Trading Higher For Now But QE Taper Bearish Pressure Remains

US Stocks traded higher yesterday, continuing the mild bullish recovery seen on Monday but camein spite of the big economic setback that is the partial shutdown of US Government.

How bad is this partial shutdown? White House estimate that it will cost the Economy $10 billion per week, while Goldman Sachs economists are much more pessimistic, suggesting that US GDP could be shaved by 0.9% if the shutdown persist for 3 weeks. This amounts to $141 Billion based on 2012 GDP numbers, almost 5 times what White House analysts predicts. It is likely that the truth may be somewhere in between, but the implications are clear – let the shutdown drag on, and the US economy will certainly suffer. Oh, and that is assuming that the 2 warring political parties manage to lift the Debt Ceiling by 17th October, and it is highly unlikely that this is possible if they cannot even resolve current budget issues.

However, looking at S&P 500’s 0.80% gain and even Dow 30’s more modest gain of 0.41%, it is clear that markets aren’t negatively impacted. In fact, S&P 500 actually managed to climb above Friday’s closing levels, effectively filling the bearish Monday gap that appeared in response to the House of Representative bill which was passed over the weekend – the bill that suggested a Government partial shutdown was imminent. Hence, current price levels suggest that sentiment wise the market (or at least the S&P 500 traders) has moved on from the US Governmental Shutdown event, and it is unlikely that further delays/setbacks in getting US Government reopen again will push prices sharply lower.

S&P 500 Hourly Chart


From a technical perspective, the ability of price to breach the 1,692 – 1,702 consolidation range opens up 1,702 as a viable bullish target. However, Stochastic readings favor a bearish move with readings pointing lower after peaking within the Oversold region. Hence, a retest of 1,692 cannot be ruled out a move towards 1,702 may have to wait until a confirmation of 1,692 holding has been established.

Dow 30 Hourly Chart


Dow 30 remains much more bearish, as Monday’s gap has only been half filled. Nonetheless, Dow 30 has reached its own significant bullish milestone of tagging last Friday’s swing low briefly. Similar to S&P 500, Stochastic readings are also on the brink of indicating a bearish cycle signal.  Hence, immediate short-term direction is down, favoring a break of 15,170 towards 15,070 with 15,120 as interim support.

All in all, even though both S&P 500 and Dow 30 have exhibited short-term bullishness to varied degrees, overall pressure remains bearish. This may be due to the threat of QE tapering that is playing in speculators minds right now. Ironically, one of the most asked questions following yesterday’s political debacle was “will Bernanke taper QE in October?”. It is clear that current development may only be a subplot to the main QE storyline, and ironically the shut down in Government operations may actually be net bullish because speculators are hoping that QE will last just a little bit longer following the latest economic hit.

More Links:
AUD/USD – Moves well off Support at 0.93 back to 0.94
EUR/USD – Flirts with Resistance at 1.3550 then Eases Back Under
GBP/USD – Pound Reaches Higher, Crosses Above 1.62

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.



Chief Currency Strategist, OANDA