US equities are members of an asset class that has enjoyed a good run since mid-February. If we consider the Dow Jones Industrial Average and the S&P500 we can see just how quickly both indices have recovered since their respective sell-offs over the first five weeks of this year. In fact, both indices are now less than 5% below the all-time nominal highs they both hit back on the 19th May last year.
I’ve applied a Fibonacci Retracement to both the Dow and S&P. I’ve taken the starting point for both as the respective intra-day highs from May last year, and then projected the retracement out to take in the subsequent lowest points. For the Dow this was reached on 24th August, while for the S&P it was on 11th February this year. In both cases, the sell-off was triggered by a melt-down in Chinese equities and concerns over yuan devaluations and the knock-on deflation implications for the rest of the world.
As we can see, both indices are running into resistance around the 0.76 (76.4%) Fibonacci Retracement level. For the Dow this comes in just above 17,600 and for the S&P it’s around 2,060. As far as the Dow is concerned, there’s also a rather neat downward-sloping trend line which links recent highs and meets up with the Fib retracement (this doesn’t work on the S&P).
Now there’s no reason why both indices can’t push higher from here, take out resistance and challenge last year’s highs. However, this latest rally does feel somewhat tired and now lacks upside momentum. Investors will also bear in mind confusion over the Fed’s thinking on the timing of future rate hikes and the upcoming fourth quarter earnings season. In the meantime, there’s still this Friday’s Non-Farm Payroll numbers to consider. Maybe they could be the trigger for a move – one way or another.
Disclaimer: Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. As a marketing communication it is not subject to any prohibition on dealing ahead of the dissemination of investment research, although Spread Co operates a conflict of interest policy to prevent the risk of material damage to our clients.