U.S. stocks closed Friday with strong gains for the week, leading the S&P 500 Index on track to finish October with the biggest monthly gain since 1974. Stocks continued their rally after the European rescue fund was boosted to 1 trillion Euros and banks agreed to a voluntary writedown of 50% on their Greek debt holdings. But the big question this week, of course, is whether the run will last.
As I usually like to look at longer-term charts for perspective let us now turn to two monthly charts. Before October the S&P 500 had fallen five consecutive months, mostly driven by concern the debt crisis would curtail global growth.
So after five negative months it would have been expected to see a rise in stocks for the month of October … although maybe not the second best month for stocks, ever!
Such are the current times however where volatility is as volatile as stocks themselves thanks in large part due to the wildcards that remain in politicians’ hands.
Click to EnlargeThose hefty gains also left their mark on the monthly charts. On the two charts here, note that both the S&P 500 and the Nasdaq 100 index recorded big monthly outside bars (engulfing candles). The S&P 500 held support at the 200 week simply moving average (blue line) while the Nasdaq 100 more or less finds itself right back near the highs for 2011.
Click to EnlargeSuch price action is bullish all else being equal and certainly something to keep in mind although not an actionable catalyst in and of itself.
While the S&P 500 rallied beyond its 61.8% Fibonacci retracement of the highs-to-lows move from this year, the European indices, at least the German DAX and the Eurostoxx 50 are still well within those resistance zones.
Click to Enlarge Given that the rally off the early October lows was mostly on the back of medium-term perceived positive news out of Europe it might be wise to take technical resistance clues from those indices.
Click to EnlargeAnd this again brings me full circle to the importance of the current crossroads. Charts across asset classes, from commodities to currencies and stocks, sit near significant resistance levels.
Given the volatility of the current global macro environment however it would not be surprising to see somewhat higher levels in risk assets across the board at some point in coming weeks. Eventually however the “good” news will have been priced in, fund managers will have chased the rally enough, and focus will again turn to “show me” economic results that will have to back up the recent enthusiasm for risk assets.
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