Technicals | Nov 12 2015
By James Stanley, currency analyst, FXCM
- S&P500 Technical Strategy: Flat, bull-flag opens door for long-continuation setups
- Should downward trend continue through support, this bias can turn bearish very quickly.
- As markets continue to price-in a December rate hike from the Fed, watch for weaknesses in risk-trends, such as the SPX500.
In our last article, we discussed near-term resistance at the 2,100 level as the S&P had just ratcheted higher by more than 10% in less than six weeks. Then came NFP, and for all intents and purposes, The report blew even the wildest expectations out of the water, and most of the numbers throughout the report were bullish. American Non-Farm Payrolls added 271,000 jobs versus an expectation of 180,000, and this firmly supplanted those rate-hike odds for December, as expectations increased to as much as a 72% probability of a hike.
But is this what risk assets really wanted? Markets really started their major descent in August after the minutes from the July Fed meeting leaked early, and showed significantly more dovish than the stance Ms. Yellen had taken earlier in the summer when testifying in front of Congress. And when we did get to September, and when the Fed backed down in order to ‘monitor international developments,’ the sell-off really worsened as now the world’s largest national central bank looked like they had no idea what they wanted to do.
The sell-off in the S&P continued to the end of September, but eventually the synergistic forces of ‘looser for longer’ combined with additional stimulus out of China with the expectation for an increase in stimulus out of Europe were enough to bring back the stock-buying bonanza that has become normal over the past six years of ZIRP-fueled gains [zero interest rate policy].
Now with expectations for December firmly planted, investors are left asking ‘what’s next?’ And not coincidentally, since seeing these December expectations rise and after that blowout NFP number, we’ve started to see the S&P selling-off, creating a very comfortable bull-flag formation. We discussed this in yesterday’s Market Talk entitled, S&P Downward Channel: Bull Flag or is a top in place? And as mentioned in the article, the bull-flag formation is a bullish trend-continuation pattern. So, as long as prices remain supported, the bias in the S&P remains bullish.
But it’s the potential breaks of support that make the S&P so utterly interesting right now. For support, we’re looking at the same Fib[onacci] setup that’s defined much of the price action in the market since China’s Black Monday saw a low of 1,833.50 come in to the S&P. This can be found by simply drawing a Fibonacci retracement from the 2,137.1 high to the 1,833.50 low, and you’ll notice numerous levels that have seen significant support and resistance over the past two months. At 2,065 we have the 76.4% retracement, and this is where current price action appears to be eliciting buyers. Should this level give way, look for support at the 2,021 level, which is the 61.8% retracement of this move (and also the exact top when we had that leaky Fed minutes report in August). Should 2,021 give way, look to the major psychological level of 2,000, followed shortly thereafter by 1,985.30, which is the 50% retracement of this most recent major move.
Should price action break below any of these levels, stance can slowly begin to shift to bearish based on how aggressively one wants to hit the move.
Alternatively, the up-side here is the most attractive given the veracity of this recent trend, and the bull-flag formation can help with entry. Traders can enter with stops wedged below support at 2,065, and targets set to the most recent swing-high at 2090 to offer a 1-to-1.5 risk-to-reward ratio… but a target at 2,100, traders can look for a much more attractive 1-to-2.5 risk-to-reward ratio on the long-side setup.
For those looking to treat the setup more conservatively, you can wait for price action to break out of the flag to prove that buyers will be able to reverse this short-term bearish trend. Tomorrow’s candlestick projects to approximately 2,082, so should prices break above the down-trending channel to find support in this region, that could be another long-continuation setup with an initial target at 2,100. After that, 2,115 becomes a level of interest (Monthly high), followed by 2,125 (minor psychological level) and then 2,137 (all-time high).
Reprinted with permission of the publisher. The above story can be read on the website here.
The views expressed are not by association FNArena's (see our disclaimer).
For real time news and analysis, please visit http://www.dailyfx.com/real_time_news
DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.
www.dailyfx.com
Disclaimer
Forex Capital Markets is headquartered at Financial Square 32 Old Slip, 10th Floor, New York, NY 10005 USA.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before you decide to trade the foreign exchange products offered by Forex Capital Markets, LLC, Forex Capital Markets Limited, inclusive of all EU branches, FXCM Asia Limited, or FXCM Australia Limited, any affiliates of aforementioned firms, or other firms under the FXCM group of companies [collectively “FXCM Group”] you should carefully consider your objectives, financial situation, needs and level of experience. If you decide to trade foreign exchange products offered by FXCM Australia Limited you must read and understand the Financial Services Guide and the Product Disclosure Statement. FXCM Group may provide general market information and commentary which is not intended to be investment advice and the content of this email must not be construed as personal advice. By trading, you could sustain a total loss of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading in foreign exchange products. Foreign exchange products are only suitable for those customers who fully understand the market risk. FXCM recommends you seek advice from a separate financial advisor.
FXCM Group assumes no liability for errors, inaccuracies or omissions in these materials and does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM Group shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. This email is not a solicitation to buy or sell currency. All information contained in this e-mail is strictly confidential and is only intended for use by the recipient. All e-mail sent to or from this address will be received by the FXCM corporate e-mail system and is subject to archival and review by someone other than the recipient.”
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
