Stocks Continue to Trade Under Pressure
Last week, global stock markets continued to trade under pressure, with investors spooked by the prospect central banks will begin cutting back on stimulus programs. This also comes as corporate earnings in both emerging markets and developing nations have started to reverse some of the bullish trends seen in the early parts of the reporting season, so the lagging momentum in stock markets is not altogether surprising. The real question going forward is whether or not this activity marks a short term correction of a true trend reversal that will suggest that the highs for the year have already been posted.
Over the next six weeks, this question is likely to be answered as most investors have positioned themselves for a $10 billion reduction in the Federal Reserve’s quantitative easing programs. Unfortunately, there was little in the July meeting minutes to clearly indicate whether or not this will occur, so the only real certainty here is the fact that we will start to see heightened volatility in global stock markets during the next month. Until then, there is little reason to take a bullish stance on stocks, given the fact that earnings have been lackluster and there is no way to know if the Fed truly plans to start cutting back on stimulus.
Shorter term, spread betting traders should be considering range trading strategies over the next week, as we are likely in store for a week of relatively quiet trading. Stock markets in the US will see holiday shortened trading, so we are not likely to see any real impulse moves in the initial trading sessions.
The S&P 500 continues to confirm the bearish chart patterns we cited early in the month, as the benchmark index hit new lows in the 1630 region. We did see some bounce off of that level, however, so that will be the key support level to watch next week. Any bearish breaks there should accelerate losses. Before this happens, it makes more sense to wait for short term rallies before getting into new sell positions. The first resistance level can be seen at 1675.
The FTSE 100 closed last week in the same region it began on Monday, but there was volatility in the index during the period. On the medium term charts, the bias is still to the upside but we are likely to see range trading conditions next week. Key resistance is now seen at 6615, while support is seen at 6370 on the downside.
The DAX continues to hold its position as the best performing stock index, with prices closing near important resistance in the 8450 area. On the short term charts, this is a triple top, so it makes sense to wait for a clear bull break of this area before entering into new long positions. Any failures here will send strong bearish signals, first support is seen at 8260.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.