S&P 500 battling key resistance level, may begin much awaited correction
After beginning the New Year with a worst downward streak in more than seven years amid fears of earlier than expected rise in interest rate, Standard & Poor’s 500 Index (SPX) finally ended last week on positive note at 1837.25, yet another all-time high level, after minutes from FOMC December meeting showed that Fed is certainly not interested in rate rise for a longer period of time even if the jobless rate falls below 6.5% threshold and non-farm payrolls report revealed that the US economy added only 74000 new jobs in December.
McKesson Corp. and Forest Laboratories Inc. posted gains in health-care sector, surging around 9.2% due to deals activity. Chevron Corp. and Alcoa (AA) slid down around 2.7% after earnings disappointed investors. Overall S&P 500 posted 0.6% gain last week, bringing the stock market to 1837.25, a new all-time high level.
The US stock market is battling a crucial resistance level at 1833 which is 161.8% fib level of recent upward move as shown below;
A sustained break above this resistance level would add to ongoing bullish momentum, however from current levels the market may also go for much awaited retracement, Elliott Wave pattern also justify this view as shown below:
This indicates that market may rebound from current level as the fifth wave of EW pattern is getting prolonged with the passage of time, this would not be very unusual in a scenario when Federal Reserve is all set to scale back unprecedented stimulus, jobless rate has dipped to the lowest level since 2008 and economy performed better than expectations during third quarter. All these factors may prompt central bank to consider increase in rate earlier than previous estimates.
If we look at week chart, Bearish ABCD pattern is also obvious as shown below;
So technically we have a number of reasons to have bearish bias on S&P 500, unfortunately we do not have very much different situation on fundamentals front either. S&P 500 rallied more than 30% last year, the biggest 12-month gain in more than 16 years thanks to Fed’s whopping $85 billion monthly asset purchase program, the largest QE initiative in central bank’s 100-year history, in a bid to reinforce the recession hit economy. But scenario has changed now; Fed’s asset purchase program worked well and achieved results to a considerable extent over a past few years making officials realized that it is no more needed. As a result Fed announced tapering in QE by $10 billion in December and hinted continuation of this policy until the whole QE program matures in October this year.
In the light of above mentioned scenario economists are almost unanimous in view that we might not see big gain in S&P 500 during 2014 as we saw previous year unless some exceptional macroeconomic change develops. In conclusion, I say that selling from current levels would certainly not be a bad option for long term investors. In short term, we will be waiting curiously for next FOMC minutes to analyze Fed forward guidance stance.
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