Stock Market reading through its main indices

SP500, close 2416.62

I omit the Dow Jones in this article on the main indices of the market, because, to my liking, it is only a traditional index of Wall Street, a classic, but only useful as a daily reference ('how many points rose or fell today'), but unreliable for a serious analysis, because it is very small (only 30 companies) and limited to the industry sector, which does not reflect the entire market as the SP500 SPX does.

It is important to refer to the FED, the protagonist of the week, which raised interest rates by 0.25% to the range of 2.25-2.5%. In my opinion, an erroneous Rate Hike and also with a tone not as dovish as expected by investors. With a clear deceleration of its economy a few months ago due to effects of the Trade War among other factors, with forecasts of growth to the downside, with stagnant inflation and lower than expected, with the crude oil /CL prices falling to levels of $45, with a dangerously flat yield curve, I don't understand the reason for a Rate Hike in this moment.

Also, with discussion among its members, the FED decided to lower the rates hikes from 3 to 2 for the next year, leaving among the traders a sense of uncertainty about the path that the i-rates should follow. Is because its previous statement is still fresh, when they said that in 2019 anything could happen with the i-rate in each meeting depending on the macroeconomic data.

The fact is that Powell does not tune with the markets: every time he speaks, all indices fall. With this last Rate Hike, he tried to mark a distance from Trump (who likes a low dollar), because he says that if he have to raise more rates by 2019, he will. Close by saying that nothing will prevent the FED from doing what they think is the right thing to do. Consequences: yesterday it was rumored that Trump plans to dismiss him. And then Mnuchin denied it: a new war is beginning.

Add to this unclear panorama the already partial shut down of US government and the consequences that may have in the short term, the picture does not look very encouraging for markets already established in a bearish environment with high volatility, after this brutal week (SPX -7%), its worst December since 1930 and with no-Christmas Rally.

Within the technical analysis, the weekly SPX chart shows that the Fibonacci 23.6% retracement and especially the SMA200 average, are the next key support for this index. Note that it doesn't lose the SMA200 level since mid-2010 (rebounded in early 2016) and it would be very dangerous if it does this time. If this happens, in addition to having already lost the Ichimoku support cloud in October, the SPX (and the entire market) would be placed in a long-term bearish environment, or what everyone fears: this is, the beginning of the great correction of the stock market.

The weekly chart of the SPX since the 2009 rebound: as I explain above, levels 2350-2400 are extremely important for the future of markets in 2019.

That is a good place for a rebound, as in 2016. But, its rupture could have unsuspected consequences for the stock market.

Nasdaq Composite, close 6332.99

One of the several causes for the present collapse of the market is the performance of the Nasdaq Composite COMP, today 'officially' in a bear market after falling almost 22% since its peak in September. Curious definition of 'bear market', when for weeks we have been saying that the market is clearly on the downside without having to reach that 'magical' level of 20%. In my opinion, this bearish tune comes since November when the monthly chart of the SPX closed below its moving average SMA10.

As long as the overvalued FAANGs, considered the Nasdaq's engine (until when they will be?) are not recovered, it's difficult for the COMP to reverse. Historically the pullbacks of the Nasdaq are the most powerful on Wall Street: in the crisis of 2008 it corrected 55% in a year and a half, in the dot-com crisis it lasted almost two years with a fall of more than 75%. The other shorter and more violent was in 1980: in just one month, the index collapsed 25%. My suggestion, like I said in the previous post, is to follow Apple AAPL news, every day. How they move will define the following months of this index. Remember that their bad news pulled down the FAANG and then the Nasdaq. The sad thing is that its outlook does not look very beneficial for 2019...

Already in the technical analysis, the Nasdaq COMP shows a similar chart to the SPX although its growth has been greater since the crisis of 2009 because it has appreciated almost 6.5 times its value. Since this month, it's below the Fibonacci support at 23.6% and the Ichimoku cloud, so its next big support is its average SMA200, even at 400 points away. If it does not bounce on that level, the pullback could be historical as mentioned above, because the next support is very far.

The weekly chart of the Nasdaq COMP since the 2009 rebound: it still seems a bit far from your SMA200 average and it might not reach that level. It will depend a lot on the improvement of Apple and the FAANG, and a better macroeconomic environment, like a final agreement on the Trade War between the US and China.

Russell 2000, close 1292.09

One of the big losers of this sell-off is the small business index, the Russell2000 RUT. Recently it was the great beneficiary with the Trump's Tax Reform, but today comes in a tailspin and with few signs of recovery, and even more so with the recent Rate Hike.

With this FED rate increases, financing becomes more expensive for Russell companies that have a large part of their debt in the high yield category. It is enough to see the total collapse of the price of the high yield corporate bonds in December, followed by the ETF HYG, to understand that their companies could start to struggle in 2019. As traders, a good option is to monitor corporate bonds with investment grade, followed by the ETF LQD, which can do better than the high yield.

Click to enlarge.

Daily chart of two ETF US Bonds prices: the High Yield Corporate Bond HYG and the Investment Grade Corporate Bond LQD. Note the best performance of the latter since October, falling less than 2% against high yields that fall almost 7%. Clearly, their MACD places them even in bull territory, being an interesting niche to follow for these weeks, if the recovery of the markets is given.


Simple and brief: due to my own rules of risk management, as I write in recent posts or tweets, I am out of the market since mid-November, without any long or short-term stock in my portfolio. I still see its very premature and risky for a "buy the dip" trade, I will wait for more fundamental and technical signals. My trade is limited to day tradings purchases based on technical signals of strategies such as the ADX- Ichimoku, here explained, or to swing trades in safe haven values such as gold GLD and yen FXY.

I'm always looking for sure niches, such as the corporate bonds with investment grade mentioned above. Of course, you can not miss the stock earnings, with calls and puts purchases after results, or option straddles ATM before them. Finally, the volatility, through the VXX ETN, also in the very short-term, all with adjusted stop loss. A "war-style trading", until better days come.