With stock turmoil in full swing, moving averages are acting as “lines in the sand” – Index News
March 30, 2018 2:26 pm
Price action in stock markets is increasingly becoming a by-product of unpredictable headlines around protectionism and other issues. In such an environment, besides news, technical indicators like moving averages are worth watching very closely, as they could be especially useful in helping to determine whether more declines, or a rebound are in store.
The past weeks have seen choppy and indecisive trading in equity markets, to say the least. While investors have been trying to digest a flurry of trade-related news and assess the risk of a US-China trade war materializing, a separate scandal involving Facebook and the issue of data protection started to drag tech stocks lower, exerting greater pressure on the already-stressed indices. More broadly, investors have been caught between a rock and a hard place, unable to form concrete views on the outlook for stocks, as that outlook could be altered by a single unpredictable headline related to tariffs and protectionism. Even diminishing geopolitical risks on the Korean Peninsula have been unable to push the major benchmarks back higher.
In such an unpredictable environment, where sentiment can change drastically from day to day, technical indicators can be particularly useful in helping to determine the next directional wave in markets. In this context, notice that both the S&P 500 and the Dow Jones are currently hovering just above their respective 200-day moving averages (MA). For the S&P especially, the 200-day MA has been acting as a strong support barrier for a while now; notice that the index rebounded sharply after hitting that hurdle back in February, when the equity selloff had just begun.
Moving forward, the 200-day MA may well act as the proverbial “line in the sand”. Move below it, and that could signal much greater declines on the horizon. In such a case, support in the S&P 500 may be found near the 2532 barrier, which is the index’s low from February. If that level is violated as well though, that would mark a lower low for the S&P, increasing the probability for more bearish extensions, perhaps towards the July 6 low of 2410.
On the flipside, if price action manages to remain above the 200-day MA, that would keep the outlook somewhat neutral, with the prospect for an eventual rebound. Potential advances in the index may encounter resistance initially near the crossroads of the 2695 level and the 100-day MA. An upside break of that zone may see scope for gains towards the round figure of 2800, and subsequently for the index’s all-time high, at 2872.
Fundamentally, the latest comments from both the US and China suggest neither side wants a full-blown trade war. Instead, the US appears to be seeking a significant renegotiation of its trading relationship with China, and the way to bring the Asian nation to the negotiating table seems to be warning it with imminent tariffs. For now, risk sentiment remains highly fragile and for it to recover, markets may need to see more signs that this situation is simply a prelude to serious trade talks, and not the beginning of something bigger.
Tech stocks also bear watching, for separate reasons. While FANG stocks (Facebook, Amazon, Netflix, Google) have traditionally been outperformers, they are currently facing troubles, amid speculation that these companies are set to face tighter regulatory scrutiny following Facebook’s privacy scandal. Any further weakness in technology stocks could weigh the most on the Nasdaq Composite, an index heavily populated with tech firms. That said though, note that the Nasdaq is the only one out of the major US indices that is higher year-to-date, which suggests it has been the most resilient to worries around protectionism.
Price action in stock markets is increasingly becoming a by-product of unpredictable headlines around protectionism and other issues. In such an environment, besides news, technical indicators like moving averages are worth watching very closely, as they could be especially useful in helping to determine whether more declines, or a rebound are in store.
The past weeks have seen choppy and indecisive trading in equity markets, to say the least. While investors have been trying to digest a flurry of trade-related news and assess the risk of a US-China trade war materializing, a separate scandal involving Facebook and the issue of data protection started to drag tech stocks lower, exerting greater pressure on the already-stressed indices. More broadly, investors have been caught between a rock and a hard place, unable to form concrete views on the outlook for stocks, as that outlook could be altered by a single unpredictable headline related to tariffs and protectionism. Even diminishing geopolitical risks on the Korean Peninsula have been unable to push the major benchmarks back higher.
In such an unpredictable environment, where sentiment can change drastically from day to day, technical indicators can be particularly useful in helping to determine the next directional wave in markets. In this context, notice that both the S&P 500 and the Dow Jones are currently hovering just above their respective 200-day moving averages (MA). For the S&P especially, the 200-day MA has been acting as a strong support barrier for a while now; notice that the index rebounded sharply after hitting that hurdle back in February, when the equity selloff had just begun.
Moving forward, the 200-day MA may well act as the proverbial “line in the sand”. Move below it, and that could signal much greater declines on the horizon. In such a case, support in the S&P 500 may be found near the 2532 barrier, which is the index’s low from February. If that level is violated as well though, that would mark a lower low for the S&P, increasing the probability for more bearish extensions, perhaps towards the July 6 low of 2410.
On the flipside, if price action manages to remain above the 200-day MA, that would keep the outlook somewhat neutral, with the prospect for an eventual rebound. Potential advances in the index may encounter resistance initially near the crossroads of the 2695 level and the 100-day MA. An upside break of that zone may see scope for gains towards the round figure of 2800, and subsequently for the index’s all-time high, at 2872.
Fundamentally, the latest comments from both the US and China suggest neither side wants a full-blown trade war. Instead, the US appears to be seeking a significant renegotiation of its trading relationship with China, and the way to bring the Asian nation to the negotiating table seems to be warning it with imminent tariffs. For now, risk sentiment remains highly fragile and for it to recover, markets may need to see more signs that this situation is simply a prelude to serious trade talks, and not the beginning of something bigger.
Tech stocks also bear watching, for separate reasons. While FANG stocks (Facebook, Amazon, Netflix, Google) have traditionally been outperformers, they are currently facing troubles, amid speculation that these companies are set to face tighter regulatory scrutiny following Facebook’s privacy scandal. Any further weakness in technology stocks could weigh the most on the Nasdaq Composite, an index heavily populated with tech firms. That said though, note that the Nasdaq is the only one out of the major US indices that is higher year-to-date, which suggests it has been the most resilient to worries around protectionism.
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