By James Hyerczyk
Baring a late session collapse, the September E-mini S&P 500 and the Nearby E-mini NASDAQ 100 stock index futures contracts are expected to close higher for the month. The strong close in the S&P contract will put the market in a position to challenge the higher for the year at 1413.25. The NASDAQ is moving in the same direction, but is a little behind in price movement.
Since bottoming on June 4 at 1255.50, the E-mini S&P has moved sharply higher, driven by the thought of additional stimulus by the U.S. Federal Reserve. If you recall, the market bottomed on that day following a weaker-than-expected U.S. Non-Farm Payrolls report. This news came after the index weakened from 1413.25 in late March as traders shed risky assets due to escalating European sovereign debt problems.
September E-mini S&P 500 Futures Contract
Technically, the main trend is up on the monthly swing chart due to the higher-top, higher-bottom formation. In June, the S&P stopped just shy of completing a 50% retracement before buyers stepped in. In addition, an uptrending Gann angle from the March 2009 bottom at 596.50 is providing directional support. This angle is at 1252.50 in August and will remain a key support angle until violated with selling conviction.
This chart also suggests that a breakout over 1413.25 could lead to an acceleration to the upside since there is no apparent resistance to stop it. The key to a successful breakout will be rising volume and volatility, both of which have been lacking this entire summer. If either of these two factors fails to materialize, then the rally may fizzle, setting up the index for an abrupt turnaround.
Nearby E-mini NASDAQ 100 Futures Contract
The Nearby E-mini NASDAQ 100 futures contract is in the same position as the S&P 500 on the monthly chart, but lacking some of the volatility. Uptrending Gann angle support from the November 2008 bottom at 981.75 is giving the market guidance at a rate of 32 points per month. This angle is at 2421.75 in August and is critical to the market’s long-term direction. A failure to hold this angle will be the first sign of weakness and could be indicative of the start of a substantial break.
In June 2012, the nearby contract bottomed at 2427.75. July’s move through 2628.75 helped make this price a minor bottom, so a follow-through to the upside in August will convert the bottom to a main bottom. This contract still has some work to do before it reaches the high for the year at 2785.50, but it is beginning to make strides as evidenced by the June to July rally.
After several false attempts to resume their uptrends, the major stock indices appear to have turned the corner buoyed by talk of additional aid in Europe. This coupled by the possibility of fresh stimulus from the Fed has set up the major stock indices for possible breakouts to the upside.
With the Fed meeting this week, investors will be looking for signs of additional stimulus in its policy statement. In addition, economic conditions have to continue to weaken in order to ensure the central bank will accommodate the speculative buyers. This makes the U.S. Non-Farm Payrolls report on Friday, one of the most important for the year. A weaker-than-expected number will likely mean the Fed is going to act, however, traders are still uncertain as to when it will implement additional stimulus.
The wildcard for additional gains in the stock market is Europe. When Spanish interest rates started to creep above 7% in the mid-July, stock traders responded by selling off their holdings. Additionally, the Euro reached its low for the year. Both Spanish interest rates and the Euro turned around last week when European Central Bank President Mario Draghi vowed to do all he could to preserve the Euro. Since this comment was made, the Euro has held steady and demand has risen for equities.
If Draghi can’t keep his word then any action by the Fed is likely to fail since investors will be focused more on the problems in Europe and their effects on U.S. corporate earnings. The worst case scenario will be renewed problems in Europe coupled with a lack of clarity by the Fed. This would create more investor uncertainty and likely lead to a reversal back down in the major stock indices.