Friday, May 24, 2019

Market Pulse through some of its Main Indicators

SP500 Index SPX, 2826.06

May, is always a difficult month for the stock market, and as I said in the previous post 'Sell in May and Go Away', the explanation of its recent fall is in the swings of the TradeWar, there is no more. It seems Wall Street discounted from January to May a "great" agreement between the US and China with the impressive rise of the SP500 (also thanks to stock buybacks, of course!) and now notice it will not be like that. Today, in moments of maximum tension, with the recent case of Huawei, the market seems to have opened its eyes not only to the complexity of this trade agreement but to assess the already many contradictory results in the US economy (for example, the recent very low ISM). Therefore, it's logical to presume that this correction should continue in next days or weeks. Current Trump's desperate last statements or tweets to bring the market up are notorious. He has done it before, let's see if he does it these days. That is the stupidity of today's market ...

Technically, the SPX made it difficult to overcome the strong resistance at 2,950 at the beginning of the month and its recoil is reaching the 23.6% of its Fibonacci, where it is forming a clear head and shoulder pattern with the last candle touching the neckline support. Its resolution will be key this week: if rebound it could enter to a clear ranging mode, with the possibility of overcoming the Kijun and the Ichimoku cloud in 2,874. If falls, its next support would be the powerful SMA200 in 2,777, and further down the 2,718 the 38.2% of its Fibonacci.

US 10-year Treasury Rate TNX, 2.32%

The TradeWar tensions and the indecisiveness of the market move investors taking refuge in the solid US Treasury Bonds, instead of other classic safe-haven instruments such as gold or Japanese yen. Today the benchmark US 10-year notes yield TNX has reached 2.3% the lowest since 2017, even below the 3-month Bill, which again revives the fears of a yield curve inversion.

Technically this indicator is moving in a bearish downtrend channel since January, being now in the lower line, prior to a resolution: could rebound to the channel or break this line and fall to levels of 2.2%. In the short-term, I see here a necessary correction upwards. To follow this week through the US T-Bond ETF TLT or triple speed 3X TLF (bullish) or TMV (bearish).

iShares Russell 2000 Index 
 IWM, $150.79 

The small caps, followed by the Russell 2000 IWM, generally suffer the swings of the market in a more marked degree, due to its greater volatility. Today, it's not exactly the best sector to invest in the middle of a Trade War but you can take advantage of its current ranging price for a swing trade. 

Since January it's moving orderly in a narrow horizontal channel between two clear support and resistance, $150 and $160 respectively, in which its main indicators are converged: SMA averages 50-100-200, and Ichimoku lines and cloud. Its ADX=18.6 (less than 20) confirms the range zone, and for these cases, the Stochastic is the best indicator. It's in 13.27, that is to say, very strong oversold, the reason why an upward rebound in the short-term can be expected. Mindful that its movement this week can correlate and influence other main indices such as the SP500 and Nasdaq.

SPDR Financial XLF ($26.86) and Technology XLK ($73.30) Funds

Some brief notes from the two most important industrial sectors of Wall Street: Financial XLF and Technology XLK, both unfavored in the current Sector Rotation, leading by the bearish Utilities sector XLU.

The Finance Sector can suffer more than any if the yield curve inverts. In addition to this, the crisis of certain major banks in the sector such as the Deutsche Bank DB (in historical lows) and a certain weakness of the Big Four, at the expense of Buffett and Berkshire, justify their bearish bias since April. Technically its weekly chart shows its price bordering his SMA50 and 100 averages, in neutral mode (yellow point in the last candle) according to the Elder Impulse System indicator. Take note that Friday rebounds in its SMA200 in its daily chart (not shown). FAS and FAZ, triple velocity ETFs of this sector, seems interesting to follow this week.

As for Technology, after its price forms an inverted V, since one month it's correcting very strongly due to the high tension in the Trade War, which has taken a decisive focus on technology. Trump and Xi know the importance of this sector, they know that who dominates the technology will become the number-one commercial world country. That is why the Huawei case is seen as only the beginning of a "Tech Cold War" that will not end even if both countries reach an agreement. Chinese reprisals against Apple AAPL are feared soon, which can deepen the XLV fall.

Both sectors find their price between the EMA exponential averages of 13 and 26 of their weekly chart, the "Value Zone" defined by Alexander Euler as the ideal moment to invest in a stock. Let's wait for some next news to predict a movement here. Now fundamentals are key here, more than technical analysis.