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S&P 500 All Set for Rebound

S&P 500 All Set for Rebound

2014-02-04 17:54:00
Research, Research Team
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Main Points:

S&P 500 dropped amid turmoil in emerging markets and fed stimulus reduction

• The stock market may rebound from current level

• EW theory shows that the market is in correction phase

Standard & Poor’s 500 Index (SPX) tumbled 0.4% to 1777.50 last week as emerging markets continued to bleed. Earning reports disappointed investors and the Fed cut stimulus. The S&P 500 extended downside movement for a third consecutive week, the longest losing streak in more than 19 months. The index hit as low as 1761.00 on Friday, the lowest level since December 18.

The US stock market closed on Friday with a hammer-like daily candle, showing that bulls are gaining momentum for a pullback. Support is seen around 1766.00, 100 Daily Moving Average (100 DMA) ahead of 1754.00 which is a swing low of previous downward wave. A break below 1754.00 will turn bias into bearish due to Lower Low (LL).

SP_500_all_set_for_rebound_after_worst_losing_streak_since_2012_body_SPX500BullishChart.png, S&P 500 All Set for Rebound

On the upside, resistance is noted around 1802-07 which is the 50% fib level of recent drop as well as 55 DMA. A break and close above 1802-07 shall target 1823-25 i.e. the 23.6% and 76.4% fib levels of the previous two waves. The level is also last notable resistance ahead of 1845.25, the high of the previous wave.

The Commodity Channel Index (CCI) and the Relative Strength Index (RSI) both are almost neutral, which mean long moves are likely. Slight positive divergence may also be noted with both MACD and CCI. On the other hand, if we apply Elliott Wave Theory into recent moves, it will look like this;

SP_500_all_set_for_rebound_after_worst_losing_streak_since_2012_body_SP500Chart.png, S&P 500 All Set for Rebound

The chart above clearly shows that the first wave of the correction phase has just been completed and now the S&P 500 may take retracement to print a Lower High (LH) as shown in the first chart. Elliott Wave (EW) theory consists of two phases, the impulsive phase and the correction phase. The correction phase is further divided into three waves: A, B and C as shown in the above chart.

The S&P 500 slid down 3.6% in January, which was its first monthly slump since August 2013. Let us have a quick look at the various factors responsible for the recent decline in the US stock market. The first and the most prominent factor was a steep fall in emerging-market currencies, which was triggered after manufacturing and economic slowdowns in China. The world’s second largest economy grew at 7.7% last year, its slowest growth for the second consecutive and the slowest since 1999, a government report stated on 20th January. Similarly, manufacturing also slowed down in China during January, HSBC Holdings said in its downbeat PMI report on 23rd January.

Earlier, on the 29th of January, the US central bank announced another cut in monthly bond purchases. Total value of monthly asset purchase program has now been reduced to $65 billion. A faster than expected reduction in stimulus is being considered by many investors as a signal for tight monetary policy in the near future as the jobless rate slumped to 6.7% in December, very close to the Fed’s 6.5% target. The US economy grew at 3.2% in the fourth quarter despite the government shutdown in October.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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