SPY ETF one-year chart
The SPY ETF one-year chart in the header image corresponds to the S&P 500 index. The two curved lines I drew in black at the right side of this chart represents a double top. Double tops portend lower prices and also a significant barrier to new highs. The horizontal orange line is the closing price. And isn’t it fascinating that it skims the previous highs on the left-hand side? You can chalk that up to coincidence if you want, but experience tells practitioners of technical analysis that prior highs are a support level. A corollary is that once prior highs are pierced, they become resistance. In any case, what this chart is showing me is that traders will take this support and trade against it. That is why I think we bounce tomorrow. Simple, right? Well, they also see the double-top, and so they will take profits before we get there. So once the momentum switches back to the downside, I think the shorts will kick in.
S&P 500 DoubleTop is now down 3% to 5% to down 5% to 7%; here’s why
S&P 500 Breaks Support Level Of 2,950, I thought we’d bounce at the 2,880-2,900-2,910 area. Friday’s low for the S&P 500 2,914.11; that’s close enough to say that this important level held. We closed at 2,932, which gives us our 3% drop. I think traders will use that as a sign for a quick trade on the long side. Also, those that shorted on Friday will look to buy in shares to lock in profits. But will this level last? I think the market needs more time to digest the escalation of the trade war with China. The constant drumbeat of lower growth in the rest of the world and contraction especially in the manufacturing PMIs. Many of which are now below 50, which represents contraction in manufacturing in places like Germany, and China.
China is notable in that it reported the lowest number in 27 years, just below 50. Here in the states, we are seeing our 10-year fall below 2%, and that has not stopped. We see the 2-year stubbornly higher than the 5-year showing inversion. This is a cause of concern for many market commentators and, in my mind, is what pushed Powell to lower Fed funds rate in the first place. If the 10-year rate continues to fall, the lower we get, the more shrill the proclamations of the coming of that ole boogeyman – recession will rise. We also haven’t heard about how China will retaliate, though it doesn’t announce that until the tariffs are actually slapped.
On the other hand, Trump could delay the tariffs to give US businesses more time to change their supply chain. In turn, China could quietly begin to buy farm products and halt Fentanyl smuggling into the US as it promised many times before. I felt obligated to give that caveat. The truth is I am in the other camp, the camp of hardening of positions. Frankly, this is good for Trump and his election prospects. And Xi, well, he has to stand tall for China’s honor. The idea that Xi is president for life is hogwash. I have explained this many times before. There are many factions in the Communist Party, and if Xi does not show strength and keep tight control, he will not be President. It was little noted, but Ming Chai, an Australian citizen, cousin of President Xi Jinping was indicted for money laundering in Australia. I find this very interesting, and I wonder if this was initiated by domestic foes of Xi to weaken him.
Xi’s rise to President was powered by his anti-corruption campaign, and here his own family is engaged in washing cash. Conspiracy aside, the fact this wasn’t swept under the rug and combine that with the near-revolution in Hong Kong means that Xi cannot appear to knuckle under to the US. I don’t write on geopolitics, I write about the stock market and stocks, and in the quiet of the weekend, I want to adjust my projection that this sell-off will be no deeper than 3-5%. I think 5% to 7% is a stronger possibility and perhaps another steeper drop early next month. The good news is that within the next four weeks, there will be definite signposts to trade between.
To know where you are going you have to know where you’ve been
Using the charts below, we see that we have put in a top, and that top will last until the fourth quarter as we gain visibility into 2020, and also we will see that Q3 will have grown smartly from Q2 GDP. How can I say that? Well, I am old enough to remember that for decades post-war the US was the world’s engine of growth. There used to be a saying that if the US caught a cold, the rest of the world would have pneumonia. The consumer is 70% of our economy, and the consumer is earning more, saving more and spending more. Energy is cheap and coming more and more from US sources.
Friday’s employment numbers included 16,000 new manufacturing hires. In the Obama admin, there were no manufacturing jobs added; tens of thousands were lost and expected to never come back. I am mentioning this not as a dig to the Obama admin, but just that manufacturing jobs are not a given, and they could be lost in droves even while the economy is growing. This is further proof that the US economy is healthy, it is growing, and the stock market will finish the year above the recent high.
That position if you agree is a powerful signpost in which to operate, so to sum it all up is we have an interim top. Presuming that we get the 5% to 7% drops to buy equity or to set up call spreads knowing where the upper limits are, a disciplined trader can do very nicely in that world.