SUMMER FALL MAY SET TONE FOR AUTUMN

 
David Morris
CFD MARKET STRATEGIST, GFT

When I set off on holiday two weeks ago, equities were soaring. The S&P was threatening to burst through the top end of a significant band of resistance between 1,124 and 1,130. This is an area defined by the 50 per cent retracement of the fall from the October 2007 high to the March 2009 low, and more recently, the retracement of the sell-off from April to March this year. Driving the rise were the second quarter earnings figures, which were generally interpreted as bullish. The constant stream of poor data convinced investors that the Federal Reserve was on the cusp of announcing a further round of stimulus measures, or QE 2.

But the resistance held, and last week saw the US indices slump to their current levels, with the S&P now testing support at 1,075/80. The trigger seems to have been disappointment following last Tuesday’s FOMC statement. The Fed once again expressed its concerns about the US economy and tempered its outlook for growth. It also announced that the proceeds of its holdings of mortgage backed securities would be used to purchase Treasuries, delaying its exit strategy. This was not the stimulus announcement that the market had been hoping for, and led to a sharp sell-off that gathered pace into Wednesday.

This move saw the S&P fall back below its 50, 100 and 200-day moving averages (DMA). If the weakness continues, it won’t be long before the 100-DMA breaks below the 200 based on their current trajectories. The last time this happened was in December 2007 and the S&P then lost more than 50 per cent of its value. But if equities can snap back from current levels, then we look set for further range-bound trading for now.

Although August marks the peak of the holiday season, it isn’t unusual to see big intra-day price moves. The question is whether the recent weak tone is setting the scene for a dismal second half, or if we can expect another rebound once the trading desks are again fully manned.