Risk Unravelling? Or Profit taking? – S&P 500 and DOW below significant levels

US Stocks suffered the worst day since November 2012. S&P 500 fell 1.2%, falling back below 1,500 while the Dow Jones Industrial Average lost 129.71 points (0.9%) to trade below 14,000. This is a huge disappointment especially for the DOW after barely able to sustain above 14,000 last Friday. Analysts attribute this decline due to concerns on the ongoing European Debt Crisis, however news wires from the Euro-zone weren’t particularly heavy yesterday, with Euro-Zone PPI the only significant news release yesterday – which came in as expected at 2.1% – certainly no reason to panic. Leaders from both EU and ECB were also silent, without any surprising statements knocking investors socks off. Hence the hypothesis of Europe Crisis pulling down US stock prices appear to be a long shot at best. At worst, it feels as it analysts and journalists alike were simply looking at the elephant in the room, and then proclaiming “ah ha! – it must be your fault”, without realizing the irony that this particular huge elephant has been around even when US stocks were reaching record highs.

If one were to forcefully pin a culprit that has spook the market, perhaps US Factory Orders which came in at 1.8% could be a better candidate. Factory Orders grew at a less than expected pace of 2.2%, even after accounting for seasonal adjustment in which Dec tends to be one of the slower month due to the holiday season and overstocking from Sep to Nov in preparation of the said holiday season. That being said, US Factory Orders tend not to produce huge ripples in markets, unless the print is way off the mark.

Perhaps the best explanation then, would be simply that market is taking a breather from all the buying, and we are looking at investors simply taking profits from the wonderful January. Let us take a look at the charts to see if price action collaborate this hypothesis.

S&P 500 Futures Hourly Chart

Though the decline was stark, price manage o find support around 1,495 with Stochastic indicator hinting that a bottom is in place as readings push above Oversold region. Bulls will need price to clear the 1,500 once more to have a return of the bullish run, or at worst a sideways trend between 1,500 to 1,508. Failure to break 1,500 resulting in a move back below 1,495 may accelerate bearish momentum.

DOW Futures Hourly Chart

Very similar to S&P 500 chart, due to the high correlation both stock indices enjoy. Support is found just around 13,836, the previous low on 29th Jan and 1st Feb, just like S&P 500. Diagnosis of DOW is similar to S&P 500, though it appears that bullish momentum on DOW has already begun with price clearing the 13,836 – 13,876 consolidation zone. If this bullishness in DOW is confirmed, expect S&P 500 to follow suit.

US 10Y T-Note Hourly Chart

As covered yesterday, 132.0 is a significant resistance for 10Y prices. Failure to test the level once more yesterday will come back and sting the “risk-off” naysayers. Currently prices appear to have crept back below 31st Jan’s high, opening up the trading range between 131.3 – 131.8.

It seems that both equities and bonds have found support/resistance against further risk-off moves. Based on short-term evidences, it does not seem that market is really fearful, but rather simply taking profit. Bullishness remain in the market with traders willing to buy on dips – hence we see support lines being confirmed. This however does mean that the traders may not have taken into consideration the huge European elephant left in the room, all confused at the party wondering what the bullish fuss is all about.

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