Saturday, September 21, 2013

Stock Market Update: Fed stays the course...

To the surprise of most, on Wednesday the Federal Reserve decided to continue it's quantitative easing program in full with zero reductions in asset purchases. In hindsight I guess this could have been foreseen, since unemployment still remains above the 6.5% threshold and with inflation below. CNBC has more in depth analysis.

The charts above highlight the typical "QE" pattern. After the initial jump in the markets after each of the QE announcements, the following day became a sell the news event. Typically retracing all the gains made the day of the announcement, and in the case of QE 3, it kicked off what became close to a 10% pullback.

I bring this up not to scare you, but to show how buying the initial announcement can be risky. And also to point out that it is not unusual for the markets to retrace all the gains of a major Fed announcement.

The S+P 500 had come into some short term resistance around 1730-31 which is defined by the length each swing high put in above the previous.

Now we find ourselves in a pullback in search for support below. I see the 1709 level as good support, it defines the August 2nd top and also matches the size of the biggest correction (21 pts.) off the rally from the low a few weeks ago at 1626. We reached that level on Friday just before the close. The next major support level below comes in around 1685, as defined by the breakaway gap left behind during the initial concerns over the Syria situation.

As long as we hold these above levels, I believe the market will reach the upside targets in the Dow and the S+P 500 (16,600 and 1775 respectively).

The NYAD continues to stall out around the 36k level. We really need to see a clean break above to see any continued strength in the major averages.

This week for economic data the focus will be more on the Eurozone, as Sunday the German Federal Elections will be held, bookended by ECB president speeches.