StockDesk Monday Update: S&P 500...
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May
25
Richard Cox
StockDesk Monday Update: S&P 500 Vulnerable After Fed Comments
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Stock markets and the US Dollar saw moved in opposing directions into the end of last week, as congressional testimony from the US Fed Chairman Ben Bernanke was upbeat on the economy, essentially suggesting that quantitative easing stimulus is starting to become less necessary.  At the moment, the Fed makes monthly purchases in mortgage backed securities equal to $85 billion but we could start to see some reductions in these figures if consistent improvements are seen in the labor market.

This is a negative for the broader indices as it will make things more difficult for companies looking to improve on past earnings performances.  Stocks saw some downside retracement after Bernanke’s testimony and, with valuations at elevated levels (still holding near their all-time highs), it would not be surprising to see investors book profits and close positions ahead of the summer months.  If this occurs, we will likely see short bouts of increased volatility in June as long term investors square positions.

Focus on Oil and XOM  

It should be remembered that changes in policy strategy from the Fed will not only affect stocks, but commodities and currencies markets as well.  Removing stimulus would be bullish for the US Dollar, and negative for assets priced in Dollars (such as oil and gold).  In addition to this, we saw a very weak monthly manufacturing data out of China (May’s PMI survey showed contraction).  This is a negative for demand prospects in oil, and matches the wider trends likely to be created by a stronger Dollar in coming months.  Oil prices are still trading within striking distance of their highs for the year, so these combined factors create a scenario for selling both oil and oil-producing companies.

Chart Perspective

Oil:  

The highs for the year in oil come in just below the key psychological barrier at 100.  We are still trading relatively close to this area and with the series of lower highs now visible on the daily charts (starting from the September 2012 highs).  This creates a bearish scenario on both a technical and fundamental basis, as long as prices hold below the 96 level.  To the downside, initial support comes in at 92.80, which is historical support and the 38.2% fib retracement of the rally from 86.  Bias is bearish at least until this support level is tested but a larger failure at 96 suggests that this support will give way before the end of next quarter.

 

Exxon Mobil (XOM):

XOM is another bearish technical picture, after failing to overcome historical resistance at 93.50.  Long term, the bearish target can be found at 89.40, which is a historical level and comes in just ahead of Fib support at 89.25.  This level is the 50% Fib retracement of the rally from 84.90, so we could see a bounce here once tested.  The bearish bias holds as long as the double top at 93.50 remains intact.  If we do see a break of support at 89.40, negative momentum is expected to accelerate as there is little in the way of technical support until the triple bottom at 84.90.



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