SPX500 Supported by Two Very Important Parties

  • SPX500 sell-off last Thursday proving to be lucrative dip.
  • Policy authorities have vested interest in supporting the SPX500

Market Pullback Supported

The left chart shows the SPX500 daily time frame. Last Thursday the index pulled back to the black 20-day SMA. The RSI also moved to a relative oversold level (aqua ellipse). This provided technical support for the index. The right chart shows the SPX500 hourly time frame. Here we see that the green 5-hour EMA is above the orange 10-hour EMA. Moreover, the short-term RSI is above 50 (blue rectangle), which is the bullish side of the oscillator. I.e. the daily technical support resulted in short-term participants buying into the dip. However, it is worth noting that traders have expectations with regards to policy makers.

Monetary and Fiscal Authorities Remain Supportive

We know that the monetary authority – the Fed – is massively expansive. On 23rd March it announced a policy of unlimited QE. Moreover,  the Fed announced on Monday, 15 June that it will purchase corporate bonds. This is called the Secondary Market Corporate Credit Facility and will purchase up to $250bn corporate bonds from eligible issuers. The central bank is effectively suppressing yield, meaning that the equity market may be the only game in town as participants seek returns.

The seconds vested party is the Trump administration and its fiscal outlets. Considering this is an election year, the administration will be paying particular attention to stock markets levels. To this end the US government passed three relief packages, and one that is supplemental to support the economy. These amount to a massive $2.8tn. Further measures include a state of emergency announcement on 13 March, and the suspension of loan payments to the end of September 2020.

Given the power behind these two policymakers, dips in the index should be assessed to see if price support is evident. If so, these dips may prove to be very lucrative.