20th October - S&P weakness is a correction not reversal
20 October 2014
TECHNICALS:
Weekly continuation chart
Some technicians swear by diagonals to define and support bull (and bear) trends, others use horizontals from Prior Highs (or lows).
The S&P chart has something for both, and is encouraging for the bulls.
While some diagonals (from lows in 2011 and 2008 ) were breached early on in the sell-off, using weekly closes the long diagonal has yet to be breached on a close.
Equally, the horizontal band of support from the Prior Highs at 1845 and 1891 has yet to be breached….
Daily chart
But this chart suggests the full rehabilitation of the bulls needs a break back through the low at 1892 before they can be encouraged.
(Note the usefulness of the Fibonacci retracement support a useful additional piece for evidence to establish a turning point)
FUNDAMENTALS:
The year long bull run in the S&P has tracked the recovery of the US economy from the winter freeze that forced Q1 GDP into negative territory to its current state of health.
As the economy picked up the Fed announced the start of its taper policy and, although anxiety periodically gripped traders, worried about the economy’s ability to cope without its injection of new monthly stimulus, the S&P has rallied nevertheless.
The path higher has naturally experienced several corrections on the way, but none as deep as that experienced in recent weeks which has seen the S&P plunge from an all time high of 2014.0 to last week’s low of 1813.0; a drop of 200 points (10%).
So what lies behind this move and is it the end of the Bull run?
Over recent months there have been several factors that have combined to dent sentiment in equity markets, some economic some geopolitical:
Growing concerns the German economy is heading into recession too.
Add to this a lingering fear in the US that the sluggish recovery in the labour market and housing market may yet prove the undoing of the US recovery.
In essence, stocks are off because of growing concerns about the durability of global growth. But in reality all of these issues have been around for much of the year, so why now the turmoil?
The truth is that sentiment as much as economics and politics drives markets and sentiment right now has turned negative.
However all is not doom and gloom. Inflation almost every where is low, allowing Central Banks to keep policy at is current historically low levels. If growth were to falter the Fed, the Bank of England et al could do more.
And there is one very bright light on the horizon that so far isn’t attracting the attention it deserves: the falling oil price. The boom in shale oil and gas has propelled the US from the world’s largest energy importer to the leading global producer giving her energy security at a time of growing unrest in many of the key oil producing regions. Moreover many other countries have found they too have vast reserves of shale energy.
Saudi Arabia is concerned and appears to be helping the oil price slide by maintaining output despite growing supply in an effort to keep expensive shale oil/gas in the ground and preserve OPEC’s market dominance. Whether or not this strategy will work is unclear, but one thing is clear: lower oil prices reduces the cost of production and reduces the cost of living thereby giving a de facto economic stimulus just at the right time.
So is the bull run in the S&P a spent force? We don’t think so and see the current sell-off as yet one more correction albeit deeper than any seen earlier this year.
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23rd Oct - EUR/JPY Weakness Threatens Supports 
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19th Oct - Cocoa Resisted by Long Term 76.4%