Break Out of Break Down?

posted Aug 21, 2014, 9:32 AM by Katie Shook

The S&P500 is tapping at the door of the July 24 highs again.

What do we make of this?  The data is tough — economically speaking, the labor markets seem to be improving and inflation is still under control.  The tricky part is that the tone of the Fed — based on yesterday’s minutes release — appears to be shifting to a more hawkish stance.  I’ve been saying for a while now that the Fed’s policies have made more traditional analysis difficult.  There’s been a whole ‘bad is good and good is bad’ sort of twist to data analysis.

Well, I think it’s pretty clear the Fed is taking a serious look at how to unwind a lot of this QE as the economy is getting its legs back under it.  The question now is, how will this affect our analysis moving forward?

This is where technical analysis may be pretty useful.  The fixed income markets (aka the smart money) still have long-term interest rates pegged pretty low.  When we see the long end of the rate curve start to rise I think the equities markets will finally start to react.  In the mean time, with rates still low, it looks like the S&P500′s August dip is behind us and the 2000 level is squarely in the market’s sites.  Today should be very telling — an all-time-high close after the Fed’s minutes would be a pretty good indicator there’s more gas for the fire.  A failure here and we’ll have to take  a look at a double-top possibility and whether or not a correction is to follow.

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