Wednesday, January 2, 2019

Next critical levels for the SP500

US Economy 2018 in a minute-reading.

- The economy started the year very solid, with the momentum that came from 2017.
- With the start of the Trade War (US tariffs on Chinese imports especially, and subsequent similar response of the Chinese), industrial production and international trade began to fall. The doubts began.
- The Tax Reform, the increase in fiscal spending and the repurchase of shares allowed Wall Street and the economy to continue growing. In this sense, the FED applied the expected Rate Hikes, which reinforced the dollar against its global peers. The most vulnerable emerging markets felt this new blow.
- At the end of the year, the worsening of the Trade War, the global deceleration and distrust of investors, passed the bill to both the economy and the markets, added to a necessary technical correction in the stock markets. The word recession begins to sound strong.
- The resolution (if it happens or not) of the Trade War will determine the economic direction for 2019.

The million-dollar-question in Wall Street

The "million-dollar-question" that all the traders and investors in Wall Street made today, is what will happen the next days and weeks with the index SP500 SPX, the benchmark of the market, today in the level 2,500.

As usual, there are two components in the analysis: the fundamental and the technical, in proportion 50-50. In this case, the fundamental aspect is the one that will determine the direction of the movement, bullish or bearish, and the news and advances in the resolution of the Trade War will be its main component, there is no other factor more powerful than that. If a favorable agreement is presented to both, US and China, and Wall Street likes it, the SPX index (and all the markets without exception), will skyrocket. Otherwise, bad news and the fall can be devastating. In both cases, you will always find important levels to overcome, be they supports or resistance. Let look this in the charts, both long and short term.

In this daily chart of the SPX we can see the short-term levels. After the rebound of the last week of the year from the SMA200 level of its weekly chart (not shown here, but explained in this previous link), the price is today testing two days ago its first resistance: the level 23.6% of its Fibonacci drawn from its top of 2018, in September. This first resistance seems able to overcome it without problems because of the impulse that the price has been carrying. Then it will face two more important resistance: the 38.2% of the Fibonacci indicated and the resistance level (before support) in 2,550 (yellow line), which was its minimum of 2018. Overcoming both would be key to thinking about a serious recovery of the index. It would, therefore, be routed to the SMA200 key and to the lower level of the Ichimoku cloud, or the beginning of a new bull market.

In the monthly chart of the SPX you can analyze what can happen in the long-term. For this, it's vital to draw a Fibonacci of all its rise from its minimum in 2008, after the housing crisis. As you can see, the price is currently struggling with the level 23.6% of its fall, always below the decisive level SMA10 (the black line), which indicated me the entry to a deep correction in December, predicted here. Following the current rebound, and only with the help of the fundamentals mentioned above, the index can overcome its SMA10 and allow it to return to its maximum because there are no long-term important resistances nearby, only the short-term mentioned above. If the opposite occurs and the index begins to fall, it would face at level 2,300 the multi-year uptrendline (in yellow), strong support since 2008, perhaps the most difficult to beat down, which would be decisive to presage the future of the market. Getting below it would indicate the dreaded deepening of the bear market.