Alpari - Analytics

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US stock markets have pared all gains since start of 2018

Our bearish view is now fully confirmed:
The Dow Jones Industrial Average closed the week below 25k, at 24,688, losing 3%, the S&P500 at 2,659, or -3.9% and the NASDAQ at 7,167, or -3.8%.

All indices are below their 200-day simple moving averages and desperately trying to hold on to them. The selloff continued into mid-session on Friday as the major indices shed more than 1%, but again good corporate and GDP data provided some relief.

As far as our shorts are concerned, as prices were testing the nearest support on the NASDAQ which we were monitoring in an intermarket approach, we decided to close half of the positions on both the S&P500 and NASDAQ and lower the stop slightly above the break-even level for the SPX and leave the stop at the original value for NASDAQ to give some more room for our short to “breathe”, amid the higher volatility of this index.

Both these actions were tweeted in real time:

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The timing of both was nearly perfect, as the S&P500 bounced from its low point mid-session on Friday began right after and hit our take profit level.

Let’s look at the situation on the S&P500:

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You can easily see the shadow of Friday’s candlestick and the prices going up to our take profit level at 2,591 after we closed half the position at 2,634 and lowered the Stop Loss to slightly below breakeven at 2,691. Why did we take this decision?

look at the NASDAQ:

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Prices took a dive to the nearest support at 6,715 and seemed to stall on the news, with a small divergence forming on the RSI. Considering the long streak of losses and strong data hitting the market once again, we closed half of our position on both the S&P500 and the NASDAQ, but on the latter we left the Stop Loss at the initial level: 7,084.

There are a few fundamental considerations that indicate a potential rebound:

  • The strong GDP data at 3.5% (QoQ) which, despite signalling a slowdown from last quarter’s 4.2%, still beat estimates.
  • Consumer spending, which is a major driver of the US economy. It is putting pressure on the underlying inflation, although inflation figures are still well below the Fed’s 2% target.
  • Corporate earnings, despite some warning signs beginning to appear, are still coming out strong on the drive induced by corporate tax cut.

What are our plans now? Keep the short on the NASDAQ and check on the extent of the rebound on the S&P500 using Fibonacci retracements as a possible indicator of a continuation of the correction:

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Prices are now testing the 23.6 Fibo level and are about to test the dynamic support-turned-resistance. While this might signal a possible new short, we need to consider the divergence forming on the indicators that might confirm a possible extension of the rebound to the next Fibo level.

On a breakout above the dynamic level, a tactical short-term long trade could be attempted with a very tight Stop Loss, targeting the 38.2% Fibo level and keeping a very good risk/reward ratio.

As you can see, the NASDAQ chart is pretty much in the same situation as the S&P500, where we have our medium-term short in place, and we will hold onto it as it has ample breathing space and an eventual Stop Loss would be covered by the gains made on our half position.

Much will also depend on the situation in Europe and its possible spill-over effects; both good and bad. Last week, we had the rate decision by the ECB which, as expected, left the key interest rates unchanged and confirmed that they will remain unchanged at least until summer 2019.

During the policy statement and the following press conferences, which we covered in real time on our twitter account, Governor Draghi confirmed the trimming of the QE program and its ending by the end of year, but finally confirmed that the ECB will reinvest the proceedings of its investments to support Eurozone growth, which still needs “an ample degree of accommodative policy”.

Mr Draghi was of course questioned over the situation in Italy and its possible impact on the economy of the Eurozone. He of course confirmed once again that the duty of the central bank is price stability and not financing the debt of member states, but he also said that he personally thinks that a solution to the Italian impasse will be found and a deal between the Italian Government and Eurozone officials will be finally reached.

On such words we can explain the bounce of the stock index of the major European economy, the German DAX:

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Our short is still alive along with the broadly negative outlook from both a technical and fundamental point of view and we continue to hold our short position after the profit taking of the last two weeks with the stop at 12,200, which we will lower to 12,000 if the resistance being tested at the time of writing holds up and prices drop below Friday lows.

EURUSD:

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As anticipated last week, the break below the base of the triangle triggered a shot. That could be targeting the support at 1.1290.

Our short is still well alive on Brent oil as well:

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We’re holding onto our short position after the partial take profit on the resistance and have lowered our stop slightly below breakeven. The target of the wide resistance zone at 72.50-71 is still viable, especially if stock markets in the US head south again.

That is all for this week. Stay tuned on our social media channel and watch out for the Italian, Eurozone, Canadian GDP data, consumer price index in Australia, interest rate decision and related statement/press conference in Japan and UK and, of course, NFP and average earnings in the US on Friday.

Have a great trading week.


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