Global financial markets are entering into a decisive period. Last week’s macroeconomic data came along with a negative surprise for U.S. equity investors as ISM Manufacturing and Service PMI reports declined, NFP failed to meet the market’s expectations and average hourly earnings dropped. The only light at the end of the tunnel was the unemployment report which showed the lowest rate in 50 years (3.5%). Wall Street will focus on corporate earnings for the third quarter, inflation figures and FOMC minutes. Not to mention the U.S.-China trade negotiations in the week ahead. The only thing nearly guaranteed is a high level of volatility, which is why I touch on fundamentals briefly which is rare. This has lead me to have a close look at the S&P 500 index from a technical analysis point of view.
At first glance, the weekly chart below is bullish. The uptrend, which started last Christmas when stock indices had found a bottom after October’s crash, is still in play as weekly close rates are above the 61.8% and 78.6% Fibonacci retracement levels (2790.4 and 2892.4 points, respectively). There were several attempts to test those horizontal static support levels, but the bears failed to succeed. The S&P 500 benchmark bounced off the 55-week Exponential Moving Average four times since August 5th as equity investors effectively used the buy-dips trading strategy. The below support curve represents yearly average growth and as long as weekly close prices are above it, technical analysis points to bullish continuation.
On the other hand, every bearish test of the support range is not followed by another bullish achievement in terms of higher highs. The bulls still struggle to break through the recent top at 3022.3 charted in July. The lack of development on the upside might be viewed as weakness, and we know what the market usually does with weak players. The 13-week Relative Strength Index went off the recent highs but remained above the level of 50, which should underline the bullish sentiment. However, the 21-week Average Directional Index points to aweak momentum with a bearish bias as its mainline are far below the threshold and the surplus is negative.
Therefore, if the bulls failed to print a significant breakthrough in several weeks from now, the bears could take the market under control for quite a while. What’s more, if the support levels mentioned above weren’t able to limit bearish drops, then the whole bullish formation might crash, signalling a new bear phase.
The Daily Ichimoku Cloud signalled a deep retracement when Conversion and Base Lines crossed each other on October 1. However, the leading span remained bullish, and the retracement was limited by the lower band of the Cloud last Wednesday. A similar buy-signal occurred on August 5th when the 21-days Bollinger Band %B indicator printed a false breakthrough and Stochastic RSI performed the bullish crossover and went out of the oversold zone. As a result, the S&P 500 index bounced off the local low and closed Friday above Ichimoku resistance curves. This also points to a bullish continuation. The only concern was that Wednesday’s close rate breached the blue support trendline, which hasn’t happened since December 25, 2018. The future action will show whether that fact will be ignored or used as a bearish precedent.
Last but not least, I would highlight a huge divergence between the S&P 500, Gold and US 10-year yields. Before October 1, 2018, U.S. equities were gaining strength together with US10Y, while the price of gold was relatively stable and even declined in April – September 2018. In October-December 2018, there were game-changing events that forced all three assets to reverse, and they were moving with the usual correlation as safe-havens gained strength while high-risk assets declined. In 2019, safe-havens keep appreciating together with equities, which is abnormal. There is a bubble somewhere in this equation. I suppose, if the same trend continued for US10Y and Gold, the S&P 500 would face a blood-bath as bubbles cannot exist forever. Something to keep in mind moving forward.
Best wishes in the market this week traders!
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