The fascinating market gyrations have continued this week and if it wasn’t obvious before the roller coaster ride in U.S. equities overnight, it is now confirmed – it’s not a market for the faint of heart or the impatient.
It’s impossible to identify a single catalyst for the recent sell off in U.S. equities. Rather it has been the slow build-up of events including escalating U.S. – China trade tensions, emerging market challenges and Italian budgetary plans to mention just a few.
More recently the death of a Saudi writer in Turkey has led to fears that the Saudi investment into Silicon Valley may dry up. News that the U.S. is considering withdrawing from a 31-year-old nuclear weapons agreement with Russia, also sent a shudder through markets.
From a fundamental perspective, the U.S economy continues to exhibit a strong growth pulse and the labour market in particular remains unquestionably firm. A side effect of the strong U.S. labour market is the need for higher U.S. interest rates, which present a different set of challenges. Although for now higher interest rates are likely to present more of a challenge to emerging markets due to their reliance on offshore capital rather than to the resilient U.S. economy. A lot to take in, even before considering the possible implications of the Mid Term elections in the U.S., which are now just a few short weeks away.
The question sure to be on a lot of traders’ minds, is whether the fall in U.S. equities is the start of a prolonged decline or is the market simply experiencing another healthy pullback, a correction within a bull market (albeit a mature bull market) like the correction of February?
In recent articles https://www.cityindex.com.au/market-analysis/the-bond-bell-rings-follow-up/ the lack of evidence of seller capitulation and exhaustion in the form of loss of momentum/reversal candles, was a key reason why we remained bearish the S&P500 into the mid October bounce.
Overnight that has changed. After trading to new lows, the S&P500 now exhibits the type of reversal candle previously lacking. Providing some further support for the idea that a short-term low was put in place overnight at the 2692.25 low, is the structure of the October sell off now looks very similar to the that of Februarys decline.
However, there is one major difference between the February and October sell off which should not be ignored.
In February, the S&P500 spent only the briefest of moments below the 200-day moving average. This time around and despite the impressive overnight rally the S&P 500 has now posted consecutive daily closes below the 200-day moving average, 2770 area.
Therefore, to feel more confident that a low is in place and given the headwinds mentioned earlier, I would like to see two-day consecutive closes above the 200-day moving average and until that occurs, a move to new lows cannot be ruled out.
Source Tradingview. The figures stated are as of the 24th of October 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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