‘QE Infinity’ Rally Retraced. Now What?

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 as well as technical analysis was nearly impossible to apply for the near-term because the structural (central planning) announcements would either cause a major rally or major sell-off.  Depending on one’s point of view, however rational or irrational the ensuing rally was perceived to be, the fact is that the the second leg of the rally, courtesy of Fed Chairman Ben Bernanke, has now been fully retraced.  As backward looking statements are neither stimulating nor practical outside the halls of academia, we ask ourselves; what now?

U.S. earnings season is just around the corner and while it has plenty of potential to move the tape, major headline risk otherwise is mostly off the table for now.  For those of us applying technical and fundamental analysis to find high probability opportunities this means back to work; both technical and to some extent fundamental analysis should be somewhat more straight forward to apply for the coming weeks than they were during the first half of September.

As this column usually focuses on the technical analysis part, 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 may 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 currently above its 50, 100 and 200 day simple moving averages.  It reached the top of this channel on Sept 14th and proceeded to consolidate for a few days before correcting in price earlier this week.  Next support levels to watch are 1430, 1420 (which was previous resistance in April and August), and 1390 – 1400.  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 1480 as an upside target.

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.

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 1430 and 1390.  A break above the dotted line around 1457 should make a run towards 1480 more clear.

To summarize, we remain in an up-trending market that may get somewhat more straight forward to trade in coming weeks.  In terms of the S&P 500, the 1390 level needs to hold for this up-trend to remain and 1480 as the next upside target to be reachable in the not too distant future.




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