sp 500 daily outlook thurs 17 mar 2016 right below 2040 risk level for a potential decline 180231201

(Click to enlarge charts)

What happened yesterday/earlier

The U.S. SP 500 Index (proxy for the S&P 500 futures) has pushed higher into the 2030/40 “risk zone” after the U.S. Federal Reserve (Fed) announced the median updated interest rate hike projections has been reduced to only 2 rate hikes for this year versus an expectation of 4 hikes in the December 2015 meeting.

The Fed “dot plot” of interest rate projections will be updated every quarter and the next projection will be released in the 14/15 June 2016 meeting. In yesterday’s concluded meeting, market participants are expecting a reduction in the projected interest rate hike to 3 rather than 2 for 2016 and the more dovish tone is due to weaker global growth and heightened risks seen from the financial market turmoil in early February 2016.

Key elements

• Current price action is now right below the upper limit of the risk zone at 2040 which is defined by the upper boundary of the bearish “Ascending Wedge” and a Fibonacci cluster. For more details, click over here as per highlighted in our latest weekly outlook/strategy.
•  The 4 hour Stochastic oscillator has reached its extreme overbought level which suggests limited upside potential at this juncture as the on-going upside momentum in price action appears to be “overstretched”.
• In the internal state of the U.S. stock market, the best performing equities class since the start of this countertrend rally from 11/12 February 2016 low is the small caps firms which is represented by the Russell 2000 as it soared by 15.91% beating both the Nasdaq 100 (+12.93%) and the S&P 500 (+12.09%).  However, yesterday’s “dovish push” by the Fed was not able for the Russell 2000 to make a new high yesterday (remained below its 03 March 2016 high of 1094 where else both the Nasdaq 100 and S&P 500 ascended higher to form new highs). This observation suggests a “subtle weakness” in the internal state of the U.S. stock market as money flow has been reduced in the current outperformer, the Russell 2000  which implies yesterday’s push up seen in the S&P 500 (even though in made a new high) may not enough “strong legs” to push it higher.
• The first short-term support stands at 2004 which is defined by the 16 March 2016 minor swing low area that was tested 3 times in the past in 08 March, 10 March and 15 March 2016.

 Key levels (1 to 3 days)

Pivot (key resistance): 2040

Support: 2004 & 1970

Next resistance: 2081

Conclusion

As long as the 2040 pivotal resistance is not surpassed, we maintain our bearish stance that the Index is due for a potential multi-week decline to retrace the on-going countertrend rally start started from 11 February 2016 low of 1807 with the first potential short-term downside target set at 2004. Only a break below 2004 may trigger a further decline towards the next support at 1970 (the swing low area of 11 March 2016 that has tested the previous swing high of 26 February 2016).

However, a clearance above the 2040 pivotal resistance is likely to invalidate the expected bearish scenario to see an extension of the countertrend rally towards the next resistance at 2081 (the descending trendline that has linked the lower lows of the impending “Double Top” since the current all-time high of 2138 printed in May 2015).

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