E-mini S&P Chart Pattern: Don’t Get Too Bearish Yet

Last week after a two-day meeting, the U.S. Federal Reserve basically told investors that the economy we have right now is the economy we’re stuck with for the rest of the year. In relaying this message, the FOMC sharply reduced its forecast for U.S. growth while predicting a dismal job market. The Fed also cited the European debt crisis, spending cuts and tax increases as key reasons why conditions could worsen and threaten the economy.
 
Besides dealing President Obama’s re-election campaign a severe blow, the news also shook the confidence of corporations and job seekers who felt the U.S. economy was set to improve. With the jobs outlook improving earlier in the year, it looked as if the unemployment rate would fall slightly below 8% and the number of newly employed would continue to climb, giving Obama the boost he would need to get re-elected. If the Fed is right in its assessment, the economy should slow during the second half of the year, making the election a toss-up.
 
During its two-day meeting, the Fed decided to offer businesses and consumers the incentive to borrow and spend more when it extended Operation Twist, a program designed to drive down long-term interest rates. It also reiterated plans to keep short-term interest rates at near zero until at least late 2014. Finally, as always, it vowed to do more to stimulate the economy if necessary.

The talk of economic weakness coupled with the threat of contagion in euro triggered a sharp sell-off in the September E-mini S&P market one day after investors were able to digest the Fed’s latest assessment of the economy. The move came two days after the index had reached resistance at a major Fibonacci price level at 1353.00 and a downtrending Gann angle at 1354.50.
 
The resistance zone this week remains at 1334.00 to 1353.00 while the Gann angle drops to 1350.50 on Monday. The first important test for the market is an uptrending Gann angle at 1315.50. If downside momentum continues then traders should look for the break to continue until the market reaches the retracement zone created by the 1255.50 to 1357.00 range at 1306.25 to 1294.25.
 
Since the main trend is up on the daily chart, a test of this retracement zone could attract buying interest and trigger a reversal to the upside. Traders should be looking for the formation of a secondary higher bottom. If this occurs then we could be looking at the start of another leg higher.
 
Clearly, the key area to watch this week is 1306.25 to 1294.25. Once the E-mini S&P trades inside of this zone then traders should begin to read momentum to see if the move is likely to continue lower or if it is getting ready to hook back up. While the Fed’s assessment of the economy may have been dismal, low interest rates remain so the best return is still in the stock market.
 
There is enough liquidity available to support another move to the upside. The only unknown is the situation in Europe and it appears that strides are being made to provide stimulus and financial aid. Baring a surprise event out of Europe, stocks could be poised for a slight rise this week provided investors recognize value inside the key retracement zone.