Wednesday's Rally: The Pause That Refreshes?

Includes: EFA, IEV
by: Investment Pancake

After a steady sell off during the past weeks, markets are now staging a bit of a turnaround. We are likely to see markets test out resistance at the head-and-shoulders "neckline" - roughly the area of 1040 for the S&P 500. Failure to move significantly higher than this area for a sustained period will further confirm the bearish head-and-shoulders pattern that took shape over the last few months, and could potentially inspire traders to move the markets significantly lower.

If the market can remain higher than 1040 for a time, then resistance will come into play at around 1100 for the S&P 500 - the area marking the current near-intersection of the 50 day and 200 day simple moving averages. Both of these areas typically act as trading resistance during a bear market, so, should they do so again, then the bear market thesis will continue to persist and traders will likely act accordingly.

Meanwhile, overseas, markets remain in worse shape, technically, than the US does. While we are seeing a rally yesterday in most international equities markets, it is likely that the move higher could be constrained by trading resistance at the 50 day moving average. For the Global Dow, this area comes in at 1819, and for the Dow Jones World Index, 216. Of particular note is the stance of European large cap and developed markets stocks - poised roughly at the 50 day simple moving average as of yesterday (we see this in ETFs like the Europe 350 iShares ETF - ticker symbol IEV - and the EAFE Index iShares - ticker symbol EFA). Continued trading resistance at the 50 day simple moving average for either security will provide further confirmation of the near-term and long-term bearish trend these indexes are currently following.

Whether yesterday's rally marks a lasting turnaround for global equities, or simply a pause that refreshes the resolve on the part of bearish traders, remains to be seen. At the moment, though, caution and limited risk exposure remain the order of the day, until the market's technical posture changes fundamentally. One day, or one week, however, are not likely to resolve the bearish technical patterns that have already taken shape across global equities markets.

Disclosure: Author has no positions in any security mentioned in this article