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TECHNICALS DRIVING THE RECENT RALLY

David Morris
CFD MARKET STRATEGIST, GFT

WE HAVE seen a fair recovery in global equities over the past few days. Even Friday’s terrible retail sales numbers from the US weren’t considered bad enough to dampen renewed risk appetite. Traders concentrated on the modest improvement in consumer sentiment and used it as an excuse to buy stocks, giving global stock indices their first significant positive week in nearly two months. But does this indicate an improvement in sentiment, or is it a short-term reaction to oversold markets?

Equities have followed the euro pretty slavishly of late as they are positively correlated with the single currency. Both markets showed every sign of being oversold: stock indices were down well over 10 per cent following the highs hit in late April. Meanwhile, CFTC data showed that speculative shorts against the euro were at a record in early May. When everyone is on the same side of a trade, it doesn’t take much for a reversal to occur. Little has changed in Europe although last week’s successful Spanish and Portuguese bond auctions helped to calm nerves. This week, the euro should benefit from any public display of affection between Chancellor Angela Merkel and President Nicolas Sarkozy when they meet in Berlin.

But this could still be a technical bounce. The euro remains in a downtrend and only a break back above $1.2350 would seriously alter this. We also have to consider how it is behaving against the yen and Swiss franc. The latter has been incredibly resilient despite the Swiss National Bank’s best efforts.

For the S&P 500, there is major resistance at 1,107, which marks the 38.2 per cent Fibonacci retracement of the last big move from (roughly) 1,220 to 1,040. This has been tested twice recently. A break above here should see a test of 1,130. On the downside, support comes in at 1,040 – the February low which was tested on 25 May. A break below here makes a move to 1,008 quite likely. Good luck with your trading.