Stocks Break Key Levels After FOMC Meeting
Stock markets closed lower again this week, as most of the attention in spread betting markets was centered on the outcome of the latest monetary policy meeting from the US Federal Reserve. While there were no changes in interest rates or in the pace of QE purchases, it has started to become clear to the markets that the Fed is set on scaling back on its stimulus programs, and this is a factor that will continue to weigh on stock values for the medium term.
The S&P 500 was particularly hard hit, and dropped 2.5% after Bernanke and Co. released its final decision and accompanying statement. This is the biggest single session decline since 2011, so it is starting to look as though we have seen the top price levels in stock markets for the remainder of the quarter. At this stage, the only real question for spread betting traders is when exactly the Fed will start to cut back on its monthly purchases of treasury bonds and mortgage backed securities. Early estimates are calling for this to start happening as soon as September, so as we move forward in the summer months, some of the most important event risks will be seen when voting members of the Fed make public speeches, rather than during specific releases of macro data.
The S&P 500 saw some massive damage done to the short term charts, with prices now trading below the key psychological 1600 level. The succesive series of lower highs on the daily charts (in the 1680 and 1650 regions) now suggests that a major top is in place and that any rallies should be used for new short selling positions. The first area to get short can be found at the 1625 resistance level. To the downside, focus now rests on support at 1580. At this stage, it is likely that there is a large number of stop losses just below this area (hold backs from old long positions), so if these stops are tripped, losses are likely to accelerate to the downside.
The FTSE 100 charts are starting to look very ugly from a daily persepctive, as a head and shoulders topping pattern was starting to unfold before support at 6180 gave way. This is the area that would have made up the neckline for the pattern, so we should view this structure as reaching completion. This keeps focus on the downside, with the next level of support now seen at 6140.
The DAX was one of the worse stock performers of the week, with prices showing a strong gap into the 7270 area. This area now marks the downside support target but with the 23.6% Fib retracement of last month’s rally just below, a corrective upside bounce is becoming likely. Bias turns consolidative if we see an upside break of 8020.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.