As I had mentioned in previous post that big US market drops on 4th December were not anything serious that investors should be alarming. However US markets dropped again last Friday, December 7th. And this round, it could be very critical. There are a number of reasons investors should be cautious after this drop.
First, previous drop was merely a partial giving back of the rise due to the hope of the Buenos Aires trade negotiation talk between Trump and Xi. But Friday drop was a total retrenchment to where it was before the trade talk hope rises. As if now investors have returned to previous fear of the trade war initiated by President Trump. (Chart A)
Causes of Market Drop
A number of incidences have caused such trajectory. Contrary messages released from China press representing government authority, and the arrest of Huawei CFO ordered by US authority in Canada, just to mention a few, are the main causes. Thereby investors’ hope for trade settlement for the rest of 90 days totally vanished. Next week, there will be a vote of confidence showing which side investors will be standing. If US markets continue to slide further, a showing of absolute no confidence will be the unavoidable verdict.If a rebounding happens, investors will be giving a last chance for both sides to settle trade dispute.
Secondly, technical speaking, Friday market drops have all arrived at the strong support level for all major US markets. For S&P 500 Futures, it has landed at the strong support level of 2630 for the third time since October 2018. Professional Chartist called it a Triple Bottom pattern. Theoretically, there will be a possibility of a breakdown after market has tested a strong support after a number of times. (Chart B)
Third reason is that a “dead cross” happened in S&P 500 chart.The dead cross was caused by the crossing of the DMA 50 with DMA 200 (Chart B). This phenomena is normally causing alarm for most chartist that a deadly market crashing is imminent. However, this dead cross did not only happened this time,it appeared at August 2015 as well (Chart A). And it did not prove market deadly by then. But rather market rebounded and the bull resumed until recently.However, it crossed second time now confluence with other factors, I am not so sure whether this signal deserves stronger attention.
Significance of Market Direction Next Week
Anyhow, there will be a possibility of a rebound next week which will temporarily give investors a brief relief. If this happens, a perfect window of escape will be provided for “trapped” investors. Wiser ones should take the chance to escape, or cut loss if a bearish view is in mind. The hope of keeping the bull alive is harder than ushering in the bear. Because the complexity of the trade disputes between the two greatest economies in the world is seen becoming larger and an imminent solution seems getting dimmer.
On the other side, if markets move down further next week, it means that investors cast votes of total no confidence at all for any amicable solution for the trade war. The previous strong support level will eventually become a strong resistance for any future rises. The chart pattern will look more like a bearish trend than a struggle, keeping the bull alive. I am sure by then, global economy news carriers will make flushing bearish headlines again.
Therefore, next week market will be an important week for market watchers. It will turn out either a joy of relief for trapped investors or a celebration for sideliner (Chart C).
Let’s just keep watch on how market turns itself in the next week!
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The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions. This write up does not constitute sole advice for investment decision. Investors are advised to do further reading and research to conclude individual decision.