Stocks Pull Back from Highs After Bernanke
Stock markets held at elevated levels for most of the week, as traders awaited some key macro data from the US and China, as well as the scheduled speeches and congressional testimony from voting members of the US Federal Reserve. The main event of the week came with commentaries from Fed Chairman Ben Bernanke, which showed that
the central bank in the US is willing to alter its stimulus programs and slow its bond buying quantitative easing programs. This kept volatility to a minimum on Monday and Tuesday but when Bernanke’s comments were made public on Wednesday, the major stock indices started to post declines.
These moves are relatively unsurprising, given the fact that corporate earnings expectations are likely to be revised lower without the added support of monetary stimulus. In addition to this, manufacturing data out of China showed declines for the first time this year. This clouds the performance outlook for the global economy and takes away some of the incentive to take on massive exposure in stock markets. With valuations still near their all-time highs (and well above their near term historical averages, there is a greater chance that we will start to see some profit taking at these higher levels. Combined, all of these factors come out to a negative for stocks next week.
The S&P 500 actually broke its uptrend channel to the topside last week, with prices hitting new highs in the 1685 region before turning lower into the second half of the week. 1685 now marks the area of critical resistance en route to the next psychological level at 1700. Indicator readings continue to show over extended price activity, so if we do see prices come back into these areas, it makes sense to consider short positions. Longer term, however, the bias remains clearly to the topside, with buy on dip strategies are still the preferred approach. When looking for new areas in buy zones, the first level of support can be found at 1620. If we do see a bearish break here, the next level to watch on the downside comes in at the 1590 target.
The FTSE 100 saw some price gaps to the downside, and fell to new lows at 6620 before making an attempt to bounce. 6620 is now the key level to the downside but with limited rallies seen so far, this latest move is starting to look like a dead cat bounce. Initial resistance comes in at 6700, as this is the failure level seen after the index make its early gapping move lower.
The DAX traded higher than most of its counterparts and saw only limited declines after hitting resistance at 8550. Indicator readings are still in overbought territory, so we will likely need to see a test of support at 8260 before we will see additional runs higher.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.