It is now expected that the Federal Reserve (Fed) is not in a rush to increase interest rates. The bond traders are pushing their rate hike expectations further back, now estimating that the rate hike could take place in the latter half of 2015. Today the Federal Open Market Committee (FOMC) is expected to announce its final cut of 15 billion USD in the QE program. The focus will be on the Fed’s policy statement as market participants try to find clues on the future time table and amounts of the upcoming rate hikes.
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USA 500, weekly
Today is a Fed-day, so it makes sense to pay attention to the price action developments in the USA 500 index. This market has lived up to the expectations I had when writing the previous analysis. At the time my view was: “Momentum to the upside looks strong as daily bars have wide ranges (distance between the open and close)… USA 500 index is still reacting higher from the weekly support at (1819) and traders should look for opportunities to benefit from this process”. Now we have seen 6 trading days of an upward price move which has provided great opportunities for those taking advantage of my analysis.
The USA 500 index has moved to levels that could not be sustained the last time price entered this area. It is now trying to push above a resistance level formed by the weekly low values from this September. On a weekly level, the Money Flow Index (MFI) is still very close to the oversold area which indicates that this market is not in danger of immediately reversing significantly lower.
It seems that Fed does not have any intentions to rock the boat, but that they will allow market participants to enjoy a longer than earlier expected ride with lower interest rates. Bond traders have pushed their rate hike expectations further back, into the latter half of the year 2015. At the same time however, the QE that has been keeping this market moving higher over the last few years in now ending. In addition, a significant chunk of the S&P 500 companies’ earnings are coming from outside of the USA, while there are signs of the global economy slowing down. All these factors together could mean that USA 500 index could enter into a sideways trading pattern between the latest low and latest high. We now have a lower weekly low on closing basis, which is something we haven’t seen since the last quarter of 2011, and supports the idea of the market moving sideways rather than into new highs. This would of course be negative for investors, but great for traders who would be provided with opportunities at both ends of the sideways pattern.
USA 500, daily
Momentum has definitely been very strong ever since the market attracted institutional buyers two weeks ago and the comments from the Fed chief Mr Bullard supported the positive sentiment with his verbal QE. Since then the market has had only two down days with one of them coinciding with the 61.8% Fibonacci levels I had drawn in the previous analysis. This pause however, was very brief and the index has since continued to perform well. The fact that the Russell 2000, an index for small and medium cap stocks, has again had short term out performance relative to the bigger indices speaks about the strength of the recent move as investors have been willing to take risks (by investing in an asset class that is known to be less liquid and more volatile). In the longer term picture Russell 2000 however has been under performing the S&P since March this year.
In the daily picture, oscillators have been close to (MFI) or are in the overbought area (Stochastic) and the first of the Bollinger Bands (1.5 stdv) has been now reached. This reflects the fact that the move higher has been very strong and that we are now approaching potential resistance levels created by the latest pivot high. It also serves as a reminder that these kinds of levels are sometimes areas of increased volatility. We should therefore be aware of this possibly taking place here (close to the latest high). This is especially worth remembering when an important Fed meeting is taking place tonight. In addition, when the market approaches areas that, in the recent past, have seen significant selling, the number of stocks moving higher decreases. The index itself might still move a little bit higher should there be no negative macro surprises, but the move becomes more fragile as it is led by a diminishing number of stocks. In light of this: unless the Fed announces a new QE operation I would be looking to short the resistances and buying back close to support areas. However, this, as usual, should be done only if the changes in lower time-frame momentum supports the view.
USA 500, 4h
The index is at a resistance and has formed a wedge, which hints of weakness from the buyers’ side. This fits together with the fact that the ratio of stocks advancing versus stocks declining has decreased over the same period. Therefore a move lower would not be a surprise. As for potential levels to trade against, I would look for support at the Fibonacci levels. The nearest 23.6% Fibonacci level coincides with the 4h Bollinger bands at 1948. We should therefore see this level bearing some significance. The resistance levels are at 2000 and 2006 points.
USA 500, 1h
I suggested in my previous analysis that traders should be buyers at the lower end of the trend channels, especially when the lower end coincides with the Bollinger Bands. As we can see from the chart above, this approach has provided traders with low risk and high probability opportunities over the recent days.
Conclusion: The index is now approaching potential resistance levels created by the latest pivot high. These kinds of levels are sometimes areas of momentum reversal and volatility. We should be aware of this, especially as we have an important Fed meeting taking place tonight and follow the charts closely when considering trades. With QE ending and the world economy slowing down, the USA 500 index could enter into a sideways trading pattern between the latest low and latest high. The first sign of this is the lower weekly low. This is something we haven’t seen (on closing basis) since the last quarter of 2011 and supports the idea of market moving sideways rather than into new highs.
Disclaimer: Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of purchase or sale of any financial instrument.
Janne Muta
Chief Market Analyst
HotForex