‘QE Infinity’ Rally Wiped Out — Now What?

by Serge Berger | September 28, 2012 8:41 am

The first two weeks in September presented traders and investors with a major toggle as both the ECB and the Fed announced major further operations to stimulate economic growth.

Both fundamental and technical analysis were nearly impossible to apply because the announcements would either cause a major rally or major sell-off. Regardless of however rational or irrational the ensuing rally seemed, the fact is the second leg of the rally, courtesy of Federal Chairman Ben Bernanke, has now been fully retraced. Now, all we can do is ask: “What now?”

Earnings season is just around the corner, and while it has plenty of potential to move the tape, major headline risk is mostly off the table for now. For those of us applying technical and fundamental analysis to find high-probability opportunities, this means it’s time to get back to work; both approaches should be more straightforward in the coming weeks than they were during the first half of September.

Let’s look at some key charts, and remember that the levels highlighted are best used as reference levels rather than bulletproof support and resistance targets.

While fundamental and global macro data might not have supported much of the rally off the June lows, recognizing the intentions of the central banks helps us understand the bullish tone of the following charts.

The S&P 500 has been trading in an up-trending channel since early June and is currently above its 50-, 100- and 200-day simple moving averages. It reached the top of this channel on Sept. 14 and proceeded to consolidate for a few days before correcting in price earlier this week. Next support levels to watch are 1,430, 1,420 (which was previous resistance in April and August), and 1,390-1,400. As long as any of these levels hold as support, we remain in a defined up-trending market that should at the very least see 1,480 as an upside target.

spxdaily ‘QE Infinity’ Rally Wiped Out    Now What?

The Russell 2000 — not surprisingly in the current high-correlation, low-volatility environment — looks much the same as the S&P 500 and remains in a centrally planned up-trending market. Next upside target around 895, give or take a few points. Next support levels: 830, 815 and the zone between 800 and 810.

rutdaily ‘QE Infinity’ Rally Wiped Out    Now What?

For those that like to see the closer-up time-frames of the broader market, below is a one-hour chart looking back to mid-August. Note the important support levels near 1,430 and 1,390. A break above the dotted line around 1,457 should make a run toward 1,480 more clear.

spxhourly ‘QE Infinity’ Rally Wiped Out    Now What?

Bottom line: We remain in an up-trending market that might get somewhat more straightforward to trade in coming weeks. In terms of the S&P 500, the 1,390 level needs to hold for this up-trend to remain and 1,480 as the next upside target to be reachable in the not-too-distant future.

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