Last week was a wild ride for equities as the S&P 500 bounced on the August 2015 low and moved higher through the end of week. (See chart below.) Central bankers in Europe and Japan hinted at further stimulus measures on Wednesday and Thursday, which propelled global stock markets sharply higher into the close on Friday. Once again, the central bankers can declare Victory. #sarcasm
What now?
The S&P 500 has created a new intermediate low, and I can use some technical analysis and Fibonacci retracements (click HERE for more) to determine points of resistance that the S&P 500 will need to overcome in the coming days or weeks. The Fibonacci lines, as seen in the resistance zone in the chart below, are common points of retracement using the 12/29 high and 1/20 low. I’m assuming that we are in a downtrend or bear market for stocks and that the downtrend will continue unless we get above the high set on 12/29.
There are several patterns that could play out in the coming weeks, but this bounce may represent the best opportunity to hedge or sell equity positions in the next 12-24 months. I am expecting that the market needs to hit an overbought condition before resuming its downtrend. The resistance zone in the above chart will likely be where this rally will end.
But what about the Fundamentals?
This coming week will be busy for economic data: consumer confidence, durable goods orders, the 4th quarter GDP (first revision) and the all-important Federal Reserve statement on Wednesday at 2 p.m. The economic data since the last Fed statement has been less than stellar, so the market is looking to this statement to see if there is any hint of the Fed backing away from raising interest rates in 2016.
If the Fed statement fails to make a good impression, the U.S. stock market will likely resume its downtrend within the next 2-3 weeks. Keep in mind that if Europe and Japan do provide further stimulus in 2016, the U.S. dollar will strengthen, which will negatively impact the earnings of U.S. corporations (a negative for U.S. stocks). I don’t think the Fed will reverse course in such short order, so I am leaning toward the markets being disappointed in the latter half of the week. If I am wrong and the Fed reverses policy and turns on the stimulus spigot, then you will see a rally like no other.
Just one more thing…
Technical analysis is about chart patterns and investor psychology. They repeat over and over, and it’s my job to try and recognize these patterns. The “Head & Shoulders” pattern (click HERE for more) is commonly used to identify a top or a reversal pattern. One MIGHT be forming in the S&P 500 over the last several months, as seen in the chart below. If the pattern completes in the near future and breaches the “neckline,” this pattern implies that the S&P 500 will fall another 15% from Friday’s closing price. Will it happen? The next couple of
weeks will be revealing. Stay tuned.