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US stocks ended week mixed as Europe remains under pressure

After the decline suffered at the beginning of this month, all three major US indexes stalled in an attempt to hold on to their daily 200 SMA, a very important technical level for medium-term investors.

The S&P500 gained 0.05%, closing on Friday at 2,768 points. The same story goes for the Dow Jones, posting almost half a percentage point in gains: 0.45% at 25,444, while NASDAQ lost 0.64% at 7,449.

Once again, concerns over global trade levels and the resulting sustainability of global growth rates and tightening interest rate policies seem to be fueling volatility. The real question is whether the 9-year-long bullish cycle is really coming to an end, and whether there could be the possibility of a trend inversion.

The corporate numbers seem to remain rather strong even despite warnings which have started to appear recently, and growth should be well above 3% in the US, as data due this week might confirm. However,  something relevant might be changing. If we move to the Russell 2000 index, which is a small-cap index, we can see that the it has been stalled since mid June and, after a run up, it has been declining sharply since the beginning of September, anticipating the decline of the major indexes. Big caps are always lagging on small caps when it comes to volatility, and this movement by the Russel 2000 does not seem to leave us with great confidence.

Getting back to the major indexes, as mentioned they are all testing their daily 200 Simple Moving Average as they have done a number of times during last months, with the average flattening unlike it did in the past.

What is the situation on S&P500 and what happened to our short trade?

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The index rebound on the 16th unfortunately took our stop profit and the short position was closed. What now?

I still think that the index has downwards potential, but remember: Never fall in love with your ideas and follow the plan.

We need to objectively look at the situation, and it is telling us that there was a first reaction in the 200 SMA area, and that the price is still trying to react here and it might succeed as it did not long ago.

Confirmation of my short view would be if the index moves below the 200 SMA and the dynamic support, and that would be a major sell signal, especially if it happened after a rebound stalling on a Fibonacci level. Therefore, it is flat for now.

The same holds true for NASDAQ. A stop profit at 7,250 hit on the same day:

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The index, after trying to go below 7,000, bounced off fiercely and is attempting to remain above the 200 SMA and, more evidently than with the S&P500, the indicators, especially the RSI, seem to confirm the bounce at least in the short term.

Here the short could be attempted below the lows marked on the 11th of October.

Over in Europe, Moody’s has finally come out with its decision to downgrade Italy to Baa3, just one notch above a junk rating, and we are talking about the 3rd largest economy in the Eurozone and one of the 10 largest globally. Well, that is worrying to say the least, even if Moody’s outlook is stable for the county’s debt.

The spread with the German bund has widened and the CDS (Credit Default Swaps) has been raised considerably since the new government was elected, spiking in the last  few weeks as foreign investors dump Italian bonds at an alarming rate, adding pressure on the spread (look out for the Italian 10y bond auction due this week). Given the size of the economy involved in this crisis and the standoff between the Italian government and the EU on the budget draft, the pressure goes beyond Italy and involves all EU economies, including the largest, benchmark economy - Germany.

Here is the situation on the DAX index:

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This time, our short is still very much alive!

We decided to give additional life to this short trade, as highlighted last week, and that was for fundamental reasons and one major technical one.

From a fundamental point of view, the crisis ignited by the situation in Italy is one of the most challenging the EU has faced to date, and even if Germany has a much more resilient economy and a lower debt burden (which it pays peanuts for), it would be hit very hard by turmoil in the Eurozone that could threaten the stability of the common currency as it is designed now, and Germany is the country that has profited the most form it.

The technical reason is the very wide bearish head and shoulder forming on the index, which we described last week. Furthermore, while there has been a substantial level of correlation between the German index and the stock indexes in the US, the reactions to the upside are becoming increasingly weaker, while the short movement is gaining momentum.

In light of such a wide negative picture, it makes a lot of sense to give up some possible profits to have a longer term view. This could be a very rewarding short, especially when we managed to bring home 400 points on half a trade, there is no need to rush to get out of the remaining half. Therefore, stop profit is still at 12,200 and all eyes are on the delicate situation in Europe as it unfolds.

Below 11,400, there is a precipice and we will start trailing our stop profit.

What about the common currency against the Greenback?

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Nothing new here since last week.

The cross remains trapped in a descending tringle, with the closest important technical level being the support at 1.144 – 1.14. A break below that level, supported by macro consideration, might trigger a short for us.

Brent:

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As mentioned last week, our trigger point was the break below the support area, so we are now in a short position, with a narrow stop at 81.70, above the right shoulder of the bearish head and shoulder.

The entry level has been tested a few times and if it holds, maybe following a weak situation on the stock markets, we might look at 75.5 and 70 as targets.

Be prepared for volatility this week, with interest rate decisions in Canada and the EU (watch out for the subsequent press conferences!) on Wednesday and Thursday and the GDP and Personal Consumption data in the US on Friday. Keep an eye on your exposure regarding these currency pairs on those days.

Have a great trading week!


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