US Market Roundup – Back into Channel after Bernanke’s Downer

And so the end is finally in sight. The Federal Open Market Committee (FOMC) Chairman Ben Bernanke said yesterday that the Fed can reduce current pace of QE purchases towards the end of 2013, and stop the program entirely in 2014. This is a surprise considering that Ben Bernanke has been saying consistently in the past that removing QE3 may jeopardize current hard earned recovery. Bernanke has also mentioned in the past that employment data, though improving, is not at a comfortable level where the Fed can reduce/remove QE. Since last month’s FOMC till now, employment data has not improved leaps and bounds from recent trend, and hence it is highly unusual for Bernanke to suddenly provide an exit estimated timeline. Market certainly got caught, with Stock prices collapsing and USD strengthening significantly.

On hindsight, it was a matter of time when Bernanke would make this move. With his tenure ending in Jan 2014, it make political sense to finish up or at the very least clarify the Fed’s plans before he leaves – a technical term known us Clean Up Your Own Mess. Hence the market has it coming (especially in the past few days) for continuing to buy into speculation that a dovish Bernanke will continue to save the day, when he only has a few more months left to be “savior” which is further compounded by the fact that stock prices are heavily extended.

S&P 500 4 Hourly Chart

From a technical perspective, the bullish breakout from current Channel has been invalidated with the deep correction that has broken the 1,639/40 interim support. Price is currently sitting above the 1,625 support. There is some evidence of slowing bearish momentum from Stochastic with readings entering the Oversold region but the Signal line is still lagging far behind, which suggest that a turnaround may be in the horizon, but not necessary right here right now.

Dow 30 4 Hourly Chart

The DJI appears to be hit more heavily than S&P 500, a surprise considering that S&P 500 was looking more bearish yesterday between the 2. Similar to S&P 500, the Stochastic of DJI has also entered the Oversold region but the lagging Signal line suggest that a more probable turnaround point may be found closer to 15,000 rather than right now.

With Bernanke showing his less dovish hand, it is possible that we could see a longer-term flip in bullish sentiment. This would mean that a deeper correction may be in the works. However price will need to at the very least break current Channel floor to strengthen the case for such a scenario. Levels to watch for S&P 500 will be 1,600 round figure, while DJI bears will need to break 14,900 on top of the 15,000 as a showing of bearish resolve.

As a side note, given current disappointment surrounding Japan’s Abenomics plans. Ben Bernanke may have unwittingly wrote the death warrant for BOJ and to a lesser extent ECB. With a sudden switch of camps, it is unlikely that market will be bullish towards all the rhetoric thrown by Draghi and Kuroda for a while, and we could see Nikkei and European major indices trading lower in similar fashion with US indices at least in the short term.

More Links:
GBP/USD – Limited Gains as BOE Releases Minutes, Federal Reserve Up Next
USD/CAD – Cautious Trading Ahead of Fed Policy Announcement
AUD/USD – Quiet Ahead of FOMC Statement

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