sp 500 animal spirits in control 1845362017

Short-term Technical Outlook (Thurs, 02 Mar 2017)

(Click to enlarge charts)

What happened earlier/yesterday

The U.S. S&P 500 Index (proxy for the S&P 500 futures) has continued its relentless climb and broke above the 2385 excess major risk level with daily close above it. Our preferred bearish bias from a technical analysis perspective to trigger the start of a significant potential correction has been invalidated for now and the “melt-up” leg continues.

Despite the lack of details on U.S. President Donald Trump’s proposed tax reforms, infrastructure spending and business deregulations policies in his State of The Union’s speech yesterday, market participants continued to be in a “risk loving” mode and bided up U.S. equities especially financials stocks reinforced by a hawkish Fed’s speak from key Fed officials in the recent days.

All negative aspects from the current ambiguity surrounding President Trump’s promises of “bold” and “aggressive” fiscal policies have been casted aside and even the risk of a further credit tightening scenario via a more hawkish U.S. central bank that can hurt corporation’s profit margins in the near future has been ignored as well. Clearly, the animal spirits are in control for now.

Key technical elements

• The medium-term bullish uptrend remains intact as seen from the daily chart as the Index continues to evolve in an ascending channel in place since 11 February 2016 low (triggered by the  Yuan devaluation).
• The current up move from the 04 November 2016 low is still showing no clear sign of exhaustion yet as the daily RSI momentum oscillator continues to hover above its overbought zone without any bearish divergence signal.
• The near-term significant resistances now stands at 2411 and 2425 which is defined by the intersection of the upper boundaries of the medium-term ascending channel (depicted in blue from 11 February 2016 low) and the shorter-term ascending channel (depicted in green from 04 November 2016 low). It also confluences with a Fibonacci projection cluster (see daily & hourly chart).
• The key short-term support rests at 2371 which is defined by the former congestion range top from 21 February to 01 March 2017 and close to the 61.8% Fibonacci retracement of steep up move seen in yesterday’s U.S. session.
• The hourly Stochastic oscillator has started to inch downwards and still has room to manoeuvre to the downside before it reaches its extreme oversold level. This observation suggests that the Index may see a minor pull-back at this juncture towards the 2385 minor trendline support from the U.S. session low of 28 February 2017 (see hourly chart).
• The major resistance now stands at the 2467/78 which is defined by the upper boundary of the long-term ascending channel in place since the significant March 2009 low and a Fibonacci projection cluster of a major degree. Interestingly, the recent up move from 09 November 2017 triggered by Trumponomics is the steepest rally seen so far throughout the on-going primary bullish trend that started from the March 2009.  Current sentiment in conjunction with the pace of price action is quite similar with the late 1999 to early 2000 stock market rally where the Fed had turned hawkish and started its rate hike cycle in July 1999. At that point in time, market had ignored the negative aspects from a continuation of tightening credit conditions that can squeeze corporations’ profit margins and continued to bid up stocks, especially technology and dot.com stocks. There was also a recurring argument that dot.com firms had a different business model (lean or non-existing inventories) that can cushion revenues from a higher interest rate environment.

Key levels (1 to 3 days)

Intermediate support: 2385

Pivot (key support): 2371

Resistances: 2411 & 2425

Next support: 2338/27

Conclusion

From a technical analysis perspective, we still view the current up move as part of the “melt-up” phase that started from 11 February 2016 low and still has potential room to run towards the next major resistance zone of 2467/2478.

In the shorter-term (1 to 3 days), the Index may see a pull-back towards 2385 with a maximum limit set at the 2371 short-term pivotal support before another potential upleg materialises to target the next resistances at 2411 and 2425.

On the other hand, failure to hold above 2371 is likely to negate the bullish tone to see a deeper slide towards the next support at 2338/27 (the lower boundary of the ascending channel from 04 November 2016 low).

Charts are from City Index Advantage TraderPro

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