Wednesday, May 22, 2013

Key reversal day?

Traders and investors took a wild ride today on conflicting comments from Fed chairman Ben Bernanke and then the release of the FOMC April minutes at 1PM EST.  The bought them in the morning and sold them in the afternoon! 

Here's a daily chart of the S&P 500 and I circled yesterday's and today's trading days:

(click on chart for larger image)

Technically, the two candlesticks have formed a "bearish engulfing" pattern and the long tail to the upside on today's candlestick speaks to the wild swing on the S&P.  The index moved in a 38 point range today!

But is it a key reversal day?  The candlesticks and price action say yes.  But the price action bounced off the eight day exponential moving average (yellow line) and has not violated a short term uptrend line (white dashed) established at the end of April.  Furthermore, while volume was heavy today it has not been heavier than previous down days where the volume was heavier (see white and blue arrows).

I'll be looking for some confirmation tomorrow with a violation of the eight day EMA and the uptrend line accompanied by heavier volume.  Perhaps the spate of economic data in the morning will be the deciding factor.

As far as the Fed tapering off asset purchases, those on Wall Street who forecast a continuation of asset purchases into next year are dreaming.  Assuming the present tepid recovery stays intact, the Fed has no choice but to at least ease off the gas pedal as I believe there are genuine concerns at the central bank that they are blowing another asset bubble.  Unless price data continues to point to disinflation gathering steam, the Fed will start reducing asset purchases this summer.  I'll have more on this in my commentary this weekend.