Stocks stage relief rally

Risk appetite improved today as investors bought the latest dip in the equity indices, while safe haven Japanese yen gave way to riskier currencies in the FX markets. Earlier, European markets and US index futures were sharply lower on the back of a report saying China was seeking to retaliate against the US. Initially, that led to a sharp sell-off. But bearish speculators decided on this occasion to ease off the gas, which resulted in a sharp short squeeze rally.

The rebound in stocks could mark the start of another rally for global markets, although one always has to be wary of the potential for a dead-cat bounce. The most recent stock market sell-off was in large part due to concerns over global trade, turmoil in the emerging market currencies, and to a lesser degree concerns over tighter monetary conditions. Much of these concerns are likely to linger for a while yet and may come back to haunt investors at point down the line. But for now at least there is sense of relief:  EM currencies have steadied a little and stocks are bouncing back while gold and yen are edging lower.

Mirroring today’s bullish price action across the major indices is the S&P 500, which at the time of writing was in the process of forming a potential bullish engulfing candle on its daily chart. If it manages to do that and close above the previous day’s high of 2887, then this would be a significantly bullish development. That’s because not only such a candlestick formation is bullish, but the fact that it has happened around key support in the 2872 area is even more important – for this area was the old all-time high and a major resistance in the past. It has now turned into support, keeping intact the bullish trend and the series of higher highs and higher lows.

While things do appear bullish right now, the S&P 500 would turn bearish if in the coming days it falls back below the most recent low that preceded the latest rally at 2854. If the sellers manage to reclaim this level then we could see the onset of a correction and as minimum a drop to the next major support at 2802 would then become likely.

Source: eSignal and FOREX.com. Please note, this product is not available to our US customers.