S&P 500, Daily

Over the past few years US stock market has been rising at the back of the FED quantitative easing programs and low interest rates. Cheap money made it possible for the US companies to buy back their shares and therefore drive up the EPS (Earnings Per Share) metric, which again encouraged new money flows into the stock market. Now that that both the QE and cheap money are history the stock market has been losing its bullishness. The latest sign of this was a lower high that was put in place in November last year. This happened roughly 12 months after I forecasted that the S&P 500 index will start moving sideways.

S&P 500 index e-mini futures (ES) have over the past few days moved down and near a support area of 1861-1890. Yesterday prices stabilized and created a Doji candle after which there has been a reaction higher today. Stochastics (7,3,3), RSI (7) and MFI (7) are all oversold in the daily timeframe and the Stochastic oscillator is about to give a buy signal. This obviously depends on the price closing at the current levels or above. The nearest significant resistance level is at 1982 level that supported price action in December.

S&P 500, 240 min

Today ES has tried to challenge the upper and of the downward sloping price channel that has held price action for the last four days. The current level happens to also be a daily low from three days ago and has resisted price moves higher yesterday. The level is also a 23.6% Fibonacci level. Today price has been able to create a higher low which suggests that there is some optimism among the bulls about breaking higher. A projection made based on the width of the bearish price channel suggests that in the case of a breakout market could move to the 1982 resistance which coincides with 50% Fibonacci retracement level.

S&P 500, 60 min

A well placed hammer candle right at the lower Bollinger Bands encouraged traders to push ES outside the descending triangle. This breakout led the index future up to the resistance at 1928, but at the time of writing market is showing signs of weakness at the resistance. Oscillators are suggesting that the price is overbought and it is indeed trading above the upper Bollinger Bands and at resistance. Also a trendline drawn from the reaction highs on 7^th and 8^th January is at the same general area.

Conclusion

Market is trading at support and has shown signs of turning higher. If it can clear the 1928 resistance, the first signs of psychology chang (form bearish to bullish) we’ve seen since yesterday should turn into a more decisive move higher towards the next Fibonacci retracement level (38.2%) at 1959. Based on the chart analysis this market has the line of least resistance on the upside (at least for the short term) and should break above the current resistance at 1928 rather than make new lows. In the longer term however, the lower high that was put in place in November suggests that investors aren’t interested in taking the stock market above the last year’s high.  This view is supported by the Russell 2000 index being considerably weaker than the S&P 500. Russell is an index that consists of less liquid and therefore more risky stocks. If investors don’t see it appropriate to buy more risky but higher rewarding stocks then it signals that markets are risk averse and not likely move the markets significantly higher.

Janne Muta

Chief Market Analyst

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