Stocks not out of the woods

by Chris Becker

The Federal Reserve kept its historically low interest rates on hold overnight in one of the most anticipated FOMC meetings in recent years.  The takeaway is pretty simple, while the Fed is relatively happy with the domestic economy, although the inflation outlook has moderated and the labour market remains the key focus, it’s really about external ructions that is keeping a hold on the lever.

Name your poision: weaker Chinese growth and their stock market crash, huge volatility in oil and commodity markets, emerging market currency crises. The outcome is a lower USD, and possibly for awhile, as the Fed doubles down on its dovishness. The US dollar index (DXY) fell 1% to a four week low, dragging up all the “undollar” bets like gold, Australian dollar and Euro.

Telling however is the behaviour of stock markets, which after waiting what seemed like an eternity on the Fed, have settled into a stupor following the decision, according to futures. After suffering a significant correction since early August, clawing back nearly half of the losses, global stocks needed a signal to move back to their former highs. They didn’t get it from the Fed last night.

From one of my favourite traders, Peter L.Brandt, comes this longer term chart of the E-mini or S&P500 futures, where he surmises last night’s action was just a retest and fail of the long running sideways pattern:

peterbrandt

Zoom out to the weekly and using my chart we can see the rounding top that characterises price action throughout most of 2015 has a neckline at around 2020 points. This resistance level needs to be cleared on a Friday/weekly close to have any chance of returning to the former highs:

SP500Weekly

This pattern is somewhat of a facsimile for Australian stocks, which beat more to a Chinese tune. There are three levels and the trendline to take note of  before we get to the more important component chart. The former high at 6000 points, reached in early April is the top level, which won’t be revisited anytime soon. What’s more important are the tight support and resistance band at 5100 and 5400 points respectively.

The 5400 resistance level is more in line with the S&P500 2020 resistance level above, because support at 5100 has already been taken out and closed below in the previous three weeks. To get any inkling of a rebound, the ASX200 must close above this level and preferably below the trendline from the 2011 bear market rally low.

xjo_ax_price_weekly.22jan13_to_31dec15

What will give the bulls some support is the major component of the ASX200 – near on 50% of composition – is the financials index, XXJ (ex property trusts). I’ve made note of this sub index before, as bank stocks are really the only thing holding up the entire stock market, due to a huge correlation with the easing bias of the RBA since 2011. Having corrected over 20% since April, bank stocks remains under pressure but have found support as the Pascoe Super Fund et al have moved in:

$xxj_ax_price_weekly.23jan13_to_31dec15

But again, that long running trendline has been broken and resistance at 7000 points still needs to be cleared. Dividend season for three of the branches of Megabank (CBA went ex-dividend last month) is approaching. Absent further market volatility this normally sees demand lift as yield chasers and their marketing staff conveniently employed at Megabank bid up the stock.

But unless the RBA eases soon, or unexpectedly good local or Chinese economic news come through soon, this is just a sideways shuffle. The key level to watch for bank stocks is support at the 2014 and 2015 lows at 6500 points – the lowest horizontal orange line above. If that is taken out, the ASX200 is headed to new lows.

US stocks move the world and have yet to break their addiction with an easy Fed. We wait next month and the next for what the Fed will do, but the lack of action could paradoxically cause volatility to increase, which will then see the Fed hold off even more, especially coming into the crucial Christmas consumer orgy season.

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