So here we are, one day after the FOMC policy meeting where the committee gave us the decision on interest rates/quantitative easing tapering and its assessment on the state of the economy. For all the uncertainty the media purported the announcement would bring, U.S. stocks remained staunchly supportive of whatever the outcome would be … that is, until Ben Bernanke’s press conference started, which is when the selling began.
As the game of trading is much more about risk management than anything else, the reaction to the news is always more important than the news itself. Thus, traders and investors alike would be wise to watch closely if the market can recover yesterday’s losses or if selling pressure increases.
Specifically to the benchmark S&P 500 Index, note that the November 2012 uptrend remains firmly intact (blue), as does support by the index’s 50-day simple moving average (yellow line). The single-most important line in the sand to yours truly, as it pertains to trading the broader U.S. equity market, remains the S&P’s 50-day moving average. A break below there, and a subsequent failure also at the 1595-1600 area, would usher in lower levels — possibly an accelerated move toward the 1530-1550 area.
Closer up on the chart, note that yesterday, the S&P 500 left a nasty bearish outside day behind. Unless bulls can overcome yesterday’s weakness very soon, the path of least resistance is likely to the downside. Also note that yesterday’s reversal came right at the 61.8% Fibonacci resistance line of the move from the May 22 highs down to the June 6 lows, which if it holds as resistance should at least push the index below 1600 toward 1575.
On the other hand — as I always force myself to see both sides — should the bulls be able to overcome yesterday’s weakness, I am expecting upside toward 1670-1687-ish.
Given the weakening market breadth, however, I would see a marginal move higher as a potential double top or marginal higher high that would ultimately form a crucial medium-term top in the market.
Serge Berger is the head trader and investment strategist for The Steady Trader. As of this writing, he did not hold a position in any of the aforementioned securities. Sign up for his free weekly newsletter here.