You can tell a lot about the likely market direction by the way it reacts to news. By any measure, the bulls appear to have seized control of the helm based on yesterday's market action..
In my last post (see Key tests of market psychology), I suggested that equities needed to show further strength for the bulls to prevail. Specifically, I was watching:
- Can the Shanghai Composite rally through the downtrend line?
- How will European stocks react to the Monti resignation news?
- What will the Fed do on Wednesday and how will the market react?
We have answers for two of the three. The Shanghai Composite staged an upside rally through a downtrend that began in March. While the index may not necessarily head straight up from here, the technical outlook for Chinese stocks is far less bearish than it was a week ago. Score one for the bulls.
In Europe, the news that Italian prime minister Mario Monti was resigning early and former prime minister Silvio Berluxconi was trying to return to power frightened the markets. The French publication Libération depicted it as "the return of the mummy":
Stock markets sold off at the open on Monday, but rallied as the day went on and closed near the highs of the day. As I wrote yesterday, the STOXX 600 had staged an upside breakout through technical resistance. The index not only held on to its breakout but closed higher on the day, which is bullish.
Italy's MIB index was the hardest of of the European bourses on Monday. Nevertheless, it did rally to close near the highs of the day - another bullish sign.
This kind of market action is indicative that sellers are exhausted and the bulls are in control of the tape. Score another for the bulls.
So far, the bulls have scored two (China and Europe) and the bears none. I will be watching closely Wednesday to see the market reaction to the FOMC decision. From what I have seen so far, it looks like the Santa Claus rally is underway.
Disclosure: Long FEZ, FXI.
Disclaimer: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
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