As we reported in our first stock market report earlier today, the dollar has eased back slightly on what appears to be profit taking. The US currency’s recent upsurge had unnerved investors on Wall Street due to its impact on company earnings and US exports. But now that the greenback has eased off a tad, speculators are unwinding some of their bearish bets on US stocks. In contrast, European shares have edged lower today, weighed down by a slightly firmer euro. Admittedly, the EUR/USD’s rally today is a drop in the ocean and is unlikely to be a game changer. Nevertheless it has provided the perfect excuse needed for European speculators to book profit on their long equity positions which is not a major surprise anyway after the DAX rocketed some 450 points from its low since Tuesday.
As mentioned, the bulls and bears are battling for control of the US stock markets and soon we will hopefully find out which camp has won. Depending on what time frame you look at, both the buyers and sellers are showing flagging signs; this either suggests that one will soon deliver the knockout blow to the other or that they will come to a mutual agreement and ease control, leaving the markets to trade in small ranges.
First let’s take a look the 4-hour chart of the Dow, in figure 1. As can be seen, the index has pulled back to the 50% retracement level of the last upswing inside what appears to be a bull flag. The most recent bearish move was when the index took out support at 17830; this level is now being tested as resistance and so there is a possibility for the market to make another downward move from here. But the RSI’s bullish divergence suggests the bearish momentum is fading; thus, the bulls may be able to recapture this broken support level and cause the stock markets to rally. So in the short-term, everything hinges on this pivotal 17830 mark.
In figure 2, below, we can see the Dow has bounced off the 100-day moving average around 17705. Incidentally, this is also where a bullish trend line comes into play – although this trend line could be drawn slightly differently, in which case it would come in around the 17500 area (where we also have the 61.8% Fibonacci level converging as shown on the 4-hour chart). In any case, there is another key resistance level besides 17830 that needs to be broken before we can turn bullish: 17875. This level was formerly support and it corresponds with the 38.2% Fibonacci retracement of the recent downswing. Meanwhile the daily RSI has recently created a bearish divergence and broken through its trend line. But it is still just about managing to hold above the key 40 level. If it breaks 40 then we may see the emergence of fresh sellers. But as the long-term trend is still clearly bullish, we are giving the bulls the benefit of the doubt for the time being.