US stocks rallied strongly yesterday despite no major bullish economic news releases. S&P 500 closed 0.62% higher, while Dow Jones Industrial Average did marginally better at 0.64% while Nasdaq 100 was right smack in between at 0.63%. However, it was not a smooth one way journey higher yesterday. All 3 indexes hit their peak around New York noon and traded steadily lower after that, giving up close to 50% of the gains made. This is a sign that bullish momentum may be breaking down and does not instil strong confidence that further bullish follow-through is coming.
Then again, such behaviours cannot be regarded as unexpected, as stock traders have ignored the weaker than expected Chicago and Dallas Fed Activity Indexes while pushing higher during early US session. As such, it is obvious that the rally wasn’t fundamentally supported and the downside risk was always going to be higher.
From a technical perspective, price action on the S&P 500 remains bullish, as the decline can be simply regarded as a bearish rebound off a newly formed Channel Top. With the Channel still in play, the uptrend is intact and we could see further gains – fundamentals be damned. There are other technical indications that price is bullish – firstly the decline off the peak has rebounded off last week’s ceiling, suggesting that the bullish breakout is still in play.
The bearish cycle indicated by Stochastic indicator is also flattening around the 50.0 level. However, before we automatically assume that Stochastic curve will rebound higher from here it should be noted that 50.0 level has been acting as point of inflexion in the past rather than a reversal point looking at how Stoch curve moved last week. Nonetheless, with 50% of the bearish cycle already gone, it is unlikely that price will be able to head much lower beyond last week’s ceiling especially with Channel Bottom coming in to add further support in a few hours time.
That being said, Daily Chart is slightly more bearish as price action has demonstrated the strong bearish pressure above 1,850. Stochastic readings are also starting to push lower and a bearish cycle signal may be given soon. Should that really occur, 1,812.5 support will open up as the immediate bearish target while ultimate bearish target of 1,740 may even be possible if this rebound off 1,850 develop into the significant bearish pullback that we’ve been waiting for.
Fundamentally, it should be noted that global economic numbers have been mostly below expectations in 2014. That does not necessarily mean that the recovery narrative is no longer valid, but it is certainly true that traders/speculators and analysts alike have gotten too optimistic. This charge is applicable to central bankers and law makers too, and all these increase risk of huge bearish correction as prices are showing signs of bubbling without actual fundamental support.
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