StockDesk Wednesday Update: Stocks ...
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May
22
Richard Cox
StockDesk Wednesday Update: Stocks Flat Ahead of Bernanke Testimony
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Stocks are mostly flat into the middle of the week, as investors are holding off on committing to new positions ahead of Wednesday’s Congressional testimony from Fed Chairman Ben Bernanke.  In addition to this, the minutes from the last FOMC meeting are scheduled for release so today will be critical for assessing the long term stimulus picture for the US economy.  If we see generally upbeat comments from Bernanke and the Fed as a whole, markets will start to price in the end-date for the third round of quantitative easing.  This scenario would be a positive for the US Dollar, and a negative for both gold and oil (as these commodities are priced in Dollars).

Comments like these would also be a negative for the stock benchmarks, which are already trading at elevated levels and are highly susceptible to downside corrections if short term traders decide to take this opportunity to book profits.  So far this year, global equities markets have accumulated over $5 trillion in value.  But these gains have been largely stimulus-driven, as macro numbers remain sluggish and “better than estimated” earnings figures have been little more than small improvements on weak expectations.

Stocks Vulnerable to the Downside

From a global perspective, the Federal Reserve is ahead of the curve in its easing cycle, so indications that the current quantitative easing program will be phased out should bring the market’s attention back to the fact that these rallies are built on a house of cards. So far this week, comments from other Fed members (Lacker, Plosser, Fisher) have been unsupportive of continued stimulus, so if we see this sentiment reiterated by Bernanke, “sell in May, and go away” starts to look once again like a favorable strategy.

Chart Perspective

S&P 500 (SPX):

Capture

The upside momentum in the S&P 500 is undeniable, but bull rallies can not last forever and technical trading more more an exercise in risk-to-reward assessments than anything else.  As such, it makes sense to start looking for topping formations (such as short term head and shoulders or candlestick patterns).  Since we are at all-time highs, there is no historical resistance overhead and the way the latest bull structures have unfolded there is little in the way of obvious measures for Fib projections.  To the downside, initial support on the weekly charts can be found at the 1555 level (resistance turned support).  So if we do start to see topping formations, this is the area that becomes the price target for short sellers.

JCPenney (JCP):

Capture2

JCP is showing some interesting differences when we compare the long and short term charts.  From a weekly perspective, the stock is trading in a clear downtrend channel, but when we drill down to the hourlies, prices are still caught in a well defined uptrend channel.  This is a good scenario for short positions, as it essentially means that we are seeing an upside correction when the dominant momentum is bearish.  We are also seeing a lower high on the hourlies, so short positions can be taken on a break below 18 (which would invalidate the hourly uptrend).



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