Senior Market Strategist

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Situation remains unresolved

By David Morrison  |  21/02/2018 13:09

”stock
Equities bounced back sharply last week, but does that mean that the correction is over?

Jury undecided

The jury is still out when it comes to deciding if we’ve seen the worst of the recent stock market correction. Technically the situation remains unresolved even though last week brought a strong rally which saw the major indices break back above significant technical levels.

Strong weekly gains

All the major global indices have enjoyed a substantial recovery following the corrective sell-off at the beginning of this month. However, the move was most pronounced across the US majors. This makes sense as this is where the downside correction originated with the proximate cause being the sharp rally in US Treasury yields. Friday’s close saw the Dow Jones Industrial Index, S&P 500 and Russell 2000 all edge higher to record six consecutive positive trading sessions with the S&P posting its best weekly gain in 5 years. The NASDAQ 100 closed lower on the day as tech stocks succumbed to some position squaring ahead of the US holiday-extended weekend.

US yields in focus

The US stock market reopens this afternoon after being closed yesterday for Presidents’ Day. A couple of hours ahead of the open the major stock indices were indicating initial weakness. The Dow futures were down over 100 points, although well above lows posted earlier in the day. Once again, investors were keeping a close eye on US Treasury bonds which have sold off recently on fears that inflation is picking up. The yield on the US 10-year note is back above 2.90% and dangerously close to breaking through the key 3.0% level. There are concerns that investors will rush to dump equities should borrowing costs push much higher from current levels.

Technical levels

Traders will be keeping a close eye on technical levels this week for clues to where the market is heading next. Concentrating on the S&P 500, last week the index broke back above both its 100-day exponential moving average (EMA) at 2,660 and resistance around 2,700. If the S&P 500 can hold above 2,700 this week then there’s a good chance of further gains. However, a break below the 100-day moving average opens the possibility of a retest of support around 2,600. If this fails to hold then we could see a retest of the correction low of 2,530.

Daily S&P 500:


 
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