S&P 500 – Kumo preventing catastrophic sell-off for now

Stocks have seen 2 major sell-off events recently. Last week it was the Fed’s minutes hinting about stopping QE3. This week it was the Italian Parliamentary Election. These 2 events conspired to push S&P 500 below the hallowed 1,500 barrier, and though Bernanke tried his best to soothe market yesterday, his rousing speech about benefits of QE to the Senate was unable to bring the S&P 500 back to 1,500.

Hourly Chart

Current prices continue to remain depressed with the recent swing high post Bernanke’s speech barely testing the swing low of 22nd Feb. Price trading below the current bearish Kumo, which is expected to provide overhead resistance, though Kijuu-Sen is also providing interim support to current price action. Stochastic is less optimistic with readings still looking to head lower, suggesting that the interim support could be broken, especially with the looming Kumo ahead within the next few hours potentially squeezing price lower.

Daily Chart

On the longer-term chart, Kumo is actually supporting price at current levels though. The thick nature of the Kumo also suggest that even if bears manage to pierce into the Kumo, there will be uncertainty which works in bulls favor to retake control if possible. Stochastic indicator is also less negative with readings closer to the Oversold region, which limits penetrative ability of current bears to head lower (unless strong catalysts exists).

The divergence between long-term and short-term trend is interesting. Though it is important to note that before long-term trend can change, evidence of reversal must be witnessed in the short-term trends, and we could be looking at early stages of the bullish trend reversal right now. However, such an interpretation should preferably be supported by fundamentals, which in this case is found lacking. Both Fed minutes and Italy elections do not change the longer-term landscape fundamentally, but is merely a knee-jerk bearish reaction by the market. Perhaps market is also using this opportunity to take profit especially with this Friday’s automatic sequester cuts looming. If that is true, Friday’s event may push price higher, and potentially gaining back all that has been lost should the sequester cuts be avoided. Conversely, a confirmation of cuts may not result in that extreme reaction as traders would have less positions to liquidate if they have already been liquidating in the past week. Nonetheless, do not underestimate mob mentality and we could still see prices falling like a brick if traders feel betrayed if the sequesters do happen.

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