US stocks traded lower as the impasse over the Debt Ceiling and Governmental Budget continues with all attempts to reconcile breaking down. S&P 500 fell 0.71% while Dow 30 was lower at 0.87%, with added pressure from weaker than expected Empire Manufacturing numbers and rating agency Fitch’s placement of US’s triple A rating on “negative watch”.
However, this bearish stance did not last long, with a sharp rally seen in future prices during early Asian hours, the resultant of more bullish Asian traders with major stock indices marginally higher (or trading flat) helping to fan risk appetite. The reason for Asian traders feeling more bullish isn’t immediately clear, with fundamentals remaining the same. The only mild bullish news coming out post US market close was the report that Senate leaders have resumed talks once again, which is to be expected considering that the debt ceiling dateline of 17th October is just 2 days away. Furthermore, we’ve seen this development happening too many times in the past 2 weeks, where nothing fruitful came out. It is likely that the same scenario will play out again, and hence it is highly interesting to see that Asian traders are a tad over optimistic believing that this could be “the one” that resolves all issues ahead of the dateline.
S&P 500 Hourly Chart
Generally, such over optimism is the recipe for sharp declines in the future as the downside risks are high – market have already priced in preemptively that US will get their act together, hence if they do fail, the bearish repercussions will be tremendous. This is even before we consider the actual fundamental impact that a US default could bring. However, right now it seems that technical traders do not really care – today’s low coincided with prices tagging the soft intraday ceiling of 14th Oct, which is also the confluence with the bottom of the rising wedge. Prices are currently facing soft resistance around 1,709 level, but Stochastic readings suggest that we could still see continuation of bullish momentum perhaps towards 1,715 as there is still some more space within the Overbought region.
That being said, it should not be surprising to see prices pulling lower as well as Stochastic curve is technically above 80.0, and a u-turn in Stoch curve from here will effectively give us a bear cycle signal. This is further corroborated by price action which is showing a potential Evening Star pattern as we test current resistance.
Dow 30 Hourly Chart
This is the same for Dow 30 whose ceiling of 15,250 is being tested right now. Given that Stochastic readings are actually around 50.0 levels, the bullish potential in Dow 30 is actually higher despite being the more bearish twin versus S&P 500 for the past couple of weeks. Hence if S&P 500 does break the 1,709 level, the likelihood of Dow 30 pushing towards 15,250 and potentially accelerate higher increases.
Nonetheless, given that current rally may be irrational and extremely optimistic about the US debt ceiling outcome, traders may need to consider whether they would like to participate in this rally given that the downside risks are extremely high. We could potentially see a huge gap lower if US ultimately default, and this may be something that even the tightest of stop losses will not be able to protect.
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