US stock markets hit profit-taking and an overdue correction
In the last two weeks my articles have focused on the US stock markets and how I saw clouds on the horizon. In fact two weeks ago I speculated that important trendline resistance at 2115/2120 could even mark the high of the bull market for the Emini S&P. So far this has indeed been the exact high for the bull run, when we made a new all-time high at 2117.75 on 27 February. Last week the NASDAQ composite hit the big 5000 and the Emini Dow Jones made it through 18,000.
You will know if you follow me on Twitter or if you subscribe to my daily reports that I have increasingly been calling for a correction over the past two weeks. Last week I concentrated on many of the potential downside risks for US and other global stock markets. The charts don’t lie and when they’re telling you it’s all getting a little bit overdone you have to pay attention. I have to admit however that I did not expect the trigger to be a stronger than expected US nonfarm payrolls figure on Friday. If I had known this figure in advance I would certainly have thought carefully about exiting my small short position. But when the technicals suggest a move is likely, the fundamentals tend to back it up sooner rather than later. I have seen this over and over again in the 10 years that I have been studying technical analysis. So although I admit I was surprised that the market reacted negatively to such a strong number, I was not surprised to see the market head lower.
Clearly the focus has shifted firmly to higher US interest rates. Stocks have been pumped higher and higher on a cocktail of low interest rates and quantitative easing , but now it looks much clearer that the punchbowl is about to be taken away in the near future. I mentioned last week how debt levels have rocketed since the 2008 financial crisis, so there certainly would appear to be cause for concern, if interest rates and bond yields are about to rise.
Enough of the fundamentals let’s get back to the technicals. At the moment we have only witnessed a one-week correction in a very strong bull trend. Although I do worry about the long-term situation, in the short term there is no indication of a collapse. If a more serious sell-off in stock markets is going to take place this year, it is likely to take weeks to build a negative pattern. There is plenty of time for the market to warn us of which direction it intends to take next. Therefore at this stage I’m looking for this small short-term correction to initially offer a buying opportunity. I expect further weakness this week, but will be looking for a bounce back from important support levels.
For the Emini S&P, I wouldn’t be surprised to see a break below last week’s low at 2065 to target 2045 and perhaps even make it as far as good support at 2028/2026. If we do fall this far, I would be looking for a bounce back. What happens on this bounce will give much a greater clue to the direction of markets throughout Q2.
Technical Analyst & Trader
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