Why to expect a strong market reaction to Bernanke

Whether it’s disappointment or a hint that a further monetary boost to the economy is on its way, the speech on Friday from Federal Reserve Chairman Ben Bernanke is likely to trigger a strong swing in either direction in US stock, currency and bond markets, which are sitting on critical technical levels, one analyst says.

Bernanke delivers a widely-anticipated speech on Friday at the Fed’s annual symposium in Jackson Hole, Wyoming, and for weeks now markets have been pondering whether or not the central bank chief will use the address to pave the way for another round of monetary stimulus via quantitative easing or asset purchases. Daryl Guppy, CEO at Guppy Traders, says because US equity markets are hovering around key chart levels, investors can expect a big move up or down in response to Bernanke’s speech. “Technically, on the S&P, Dow and Nasdaq we are sitting on resistance levels and what that means is if the news is good we will have an exceptionally strong break out above the resistance levels,” Guppy told CNBC Asia’s Squawk Box on Thursday. “Equally if there is a bad news we will get a powerful retracement, so we are looking at high volatility going into Bernanke,” he added. The Dow Jones industrial average closed US trade on Thursday at 13,107.48, the S&P 500 index ended at 1,410.49 and the Nasdaq finished at 3,081.19. All three major US stock indices, which closed marginally higher, are now hovering at key resistance levels, Guppy said. He added that there was technical support in the 12,100-12,200 range on the Dow Jones index, which meant any selling here may be limited compared with other stock indices. Guppy said any good news from Bernanke could push the S&P 500 index up to 1,500 – a gain of more than 6% from current levels. US equity markets have edged higher in the last few months, helped by expectations for more monetary stimulus from the Fed. However, signs of an improvement in the jobs market and strong July retail sales numbers have dampened the talk of further easing and put investors on edge ahead of Bernanke’s Jackson Hole speech. “I don’t think we are going to get QE3 at the Fed’s next meeting, but maybe later in the year,” Don Hanna, Managing Director at Fortress Investment Group told Squawk Box, referring to a possible third round of quantitative easing from the Fed. In a sign that uncertainty in the equity markets is rising, the Chicago Board of Options Exchange Volatility Index, the VIX, has been moving higher over the last two weeks, suggesting fear is creeping back among investors. Stocks were not the only market to watch for signs of likely strong reaction to Bernanke’s speech, Guppy said, noting that Treasurys and the US dollar were also at critical levels on the technical charts. He said that the dollar index, which measures the dollar’s value against a basket of major currencies, is hovering around a long-term uptrend line in the 80-81 area. The index was trading at 81.55 in early Asia trade Thursday. “We are sitting back on this (long-term uptrend) point so we either see a strong reaction away or a strong break away from this level (in response to Bernanke),” Guppy said. “And that’s the key factor we’re seeing across the board, because we are sitting on critical levels.” - By CNBC's Dhara Ranasinghe © 2012 CNBC.com Related Links Markets May Not Change Much the Rest of This Year: Gross What Markets Really Think Bernanke Will Say on Friday Economy Will Hit Its Stride Next Year: Zandi