Technical Analysis SP500: 2016-09-30

Low interest rates are bullish for SP500

The Federal Reserve left the interest rate in the range 0.25-0.5% at September 21 policy meeting but signaled it intends to hike rates this year. Will SP500 continue rising?

The Federal Reserve held off on raising rates at its September meeting, signaling it will act at its December meeting. The US GDP expanded 1.4% in the second quarter, faster than the 1.3% quarterly rate in the first quarter. Recent economic data were soft: retail sales fell 0.3% on month in August, import and export prices fell in August after rising in previous month, industrial and manufacturing production also fell. Consumer sentiment, as reported by Michigan University, held steady in September. Housing starts and building permits fell in August. A positive development recently was the 1.1% rise in headline inflation in August from 0.8% in July. A relatively good news was better than expected durable goods report: orders for durable goods came in flat in August instead of an expected drop. However, no growth in durable goods orders after 3.9% gain in July indicates slowing of investment. In case there is no change in business investment trend in following months this points to slowing economic growth expectations. Soft recent economic data support expectations of low interest rate environment which is favorable for stocks. Chicago Fed President Charles Evans said Wednesday that the US was likely to be in a low-rate environment “for some time.” Low interest rates are bullish for stocks as they ensure access to cheap financing for US companies and prevent the strengthening of the dollar which makes US exports less competitive.

On the daily chart the SP500: D1 has been edging higher after a correction in the beginning of September following Fed policy makers’ bullish comments about a rate hike sooner rather than later. The price is consolidating in a symmetrical triangle.

The Donchian channel is tilting higher, indicating an uptrend.
The Parabolic indicator gives a buy signal.
The MACD indicator also gives a bullish signal.
The Stochastic oscillator is rising and hasn’t reached the overbought zone.

We believe the bullish momentum will continue after the price closes above the Donchain channel at 2180.03, confirmed also by fractal high. It can be used as an entry point for a pending order to buy. The stop loss can be placed below the last fractal low at 2140.73. After placing the pending order the stop loss is to be moved every day to the next fractal low, following Parabolic signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. More conservative traders can switch to the 4-hour chart and move the stop-loss in the direction of the trade. If the price meets the stop loss level(2140.73) without reaching the order(2180.03), we recommend cancelling the position: the market sustains internal changes which were not considered.

Technical Analysis Summary

Position Buy
Buy stop Above 2180.03
Stop loss Below 2140.73