The Technical View: US Stock Market on Shaky Ground

Do not get excited. Yesterday’s initial market rally fizzled, as sellers were able to push back prices and the market finished very close to their opening levels. Even worse, this is the third day in a row that the US Equity Market closed below resistance level (neckline) and the second consecutive day in which it closed below the 200-day moving average (DMA).

Volatility has also increased something that is common prior to a trend reversal. As the reversal gains momentum, volatility tends to sharply increase as traders act to take advantage of the change in direction.

But let’s start from the beginning. The US Equity Market had been in a rising trend since the beginning of this year but by the second quarter it started to show signs of weakness as more and more equities experienced a “correction” (a 10% drop from their highs). At the same time momentum was also falling, indicating weakness in trend direction. This resulted in a choppy market since April, and sellers took the upper hand by the end of June. Buyers were unable to follow through and what used to be support became resistance.

It remains to be seen how all this develops but in the short-term investors should be very cautious. Long term investors however can sleep peacefully at night. We reiterate that there is an integral relationship between time frames where short-term timeframes (daily charts) move intermediate-term timeframes (weekly charts) which eventually move long-term timeframes (monthly charts). Daily, weekly and monthly charts do not all rollover in tandem. They never have. There is precedence in the order of actions.

The weekly chart below shows that the uptrend since 2011 is still intact and the price has two major support levels (S1:2040, S2: 2000) before creating major damage in the trend foundations. The momentum oscillator’s (RSI) negative divergence and break within the bearish momentum area is something to consider but no action is required for the moment.

 

Going further back and looking at the monthly chart below, it suggests that long-term investors should stay put. In prior crises the 12-month moving average has been a reliable indicator in confirming a change in trend. When a major line of support becomes resistance, it confirms a possible trend change. Currently this is not the case. The only bearish signal we are experiencing at the moment is the MACD cross-over which also happened during the last two bear markets but in our experience, oscillators are supporting tools that merely provide warning signals. The decisive action should always be based on price itself.

You may blame Greece or you may blame China but whatever the reason is, it is already reflected in the price. The US Equity Market is on shaky ground but not all investors should worry. Short-term investors and traders are definitely feeling the summer heat while long-term investors should stay put and enjoy their vacation.

 

Costas Pierides CFTe, MSTA

Market Technician
[hr]

DISCLAIMER:
All information contained herein and any opinions expressed in it are intended solely for the use of customers of Elgin AMC (“Elgin”). This document is not, and should not be construed as an offer or solicitation to buy or sell any product, security or any other financial instrument. Any opinions expressed in this document are subject to change in that notice. This information is a marketing communication for the purpose of the European Markets in Financial Instruments Directive (MiFID) and CySEC’s Rules. It has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research. This document is not based upon detailed analysis by Elgin of any, market, issuer or security named herein and does not constitute a formal research recommendation, either expressly or otherwise. It is not investment advice and does not take into account the investment objectives and policies, financial position or portfolio composition of any recipient. This document should not to be relied upon as authoritative or taken in substitution for the exercise of your own commercial judgment. This document has been prepared on the basis of economic data, trading patterns, actual market news and events, and is only valid on the date of publication. Elgin does not make any guarantee, representation or warranty, (either expressly or impliedly), as to the factual accuracy, completeness, or sufficiency of information contained herein. This document has been prepared by the author based upon informational sources believed to be reliable and prepared in good faith. Elgin does not make any representation or warranty, express or implied, as to the accuracy, completeness or correctness of this information. Elgin does not accept any liability for any loss or damage, howsoever caused, arising from any errors, omissions or reliance on any information or views contained in this document. The value of any securities mentioned in this document may move up or down, and the value of securities denominated in other currencies will also be subject to fluctuations in the relevant exchange rates. Securities issued in emerging markets are typically subject to greater volatility and risk of loss. Elgin’s officers, directors and employees may own or have positions in any investment(s) mentioned herein or related thereto and may, from time to time, add to or dispose of any such investment(s). This information is the intellectual property of Elgin. Redistribution or dissemination of this document is prohibited.

Elgin AMC is a trading name of Numisma Capital Ltd. Numisma Capital Ltd is regulated by the Cyprus Securities and Exchange Commission (CIF licence no. 122/10) Additional information from Elgin AMC is available upon request at info@elgingamc.com