Watch 3 Indicators for the Market’s Direction
It almost feels like a game of ping-pong …
Grim headlines paint a frightening picture of a China slowdown … Optimistic headlines applaud solid corporate earnings here in the U.S. … The government shutdown leads to alarming predictions about a hobbled U.S. GDP and a recession … Dovish language from The Fed leads to predictions of no rate hikes in 2019 and a surging stock market …
Perhaps the biggest source of confusion of all is the market action itself. The S&P 500 falls nearly 20% last quarter — but then rallies 12% in a month.
What is going on? Are we coming out of a messy correction that’s just part of the broader bull market or is this the beginning of a bear?
In answering this question, many of our analysts, like Louis Navellier and Neil George, focus on the fundamental analysis of specific companies — for example, earnings growth and the health of a balance sheet. When conducting fundamental analysis, it usually means ignoring the shorter-term ups and downs of the broader market because these movements are often considered “noise.”
However, there’s also technical analysis, which is often used precisely to forecast shorter-term market moves. Think of technical analysis as studying patterns in charts and market data to identify trends and the direction of the overall market.
Many of the most seasoned investors approach markets using elements of both fundamental and technical analysis. Given this, today we want to bring you technical insights from several of our trading experts.
Understanding how they view markets can help make us wiser, more balanced investors.
***”Is the bullish run-up during the first part of January a legitimate recovery or just a ‘dead-cat bounce’ at the beginning of a longer bearish downturn?”
That’s how John Jagerson and Wade Hansen, the editors behind Strategic Trader, began their most recent update to subscribers on Wednesday. They follow by pointing toward a key market level they’re watching …
The S&P 500 broke above resistance at 2,630 at the end of last week, but it immediately pulled back to re-test that level when the market opened on Tuesday after the long three-day weekend.
Whether or not the 2,630 level is now able to hold as support will tell us a lot about where the market is likely to go during the next month.
If support holds, it will tell us traders believe the economy may still have some potential for expansion left in it. If support fails, it will tell us traders believe the economy may be contracting.
At the time of this writing, the S&P is trading at 2,666, so we’re above this key support line. We’ll be watching to see if it holds.
***But this key level isn’t the only technical indicator John and Wade are paying attention to
In addition to traditional charting indicators, John and Wade also track various macroeconomic indicators. One that helps them gauge whether the economy is expanding or contracting is an indicator that compares two sectors: consumer discretionary and consumer staples.
“Consumer discretionary” represents companies like Amazon and Home Depot. These companies do better when consumers have extra money to spend, and feel confident that their financial future will continue to be strong.
“Consumer staples” represents companies like Procter & Gamble and Walmart. These companies tend to do well even during economic slowdowns. That’s because people still need to buy basic items to live (shampoo, toothpaste) despite a souring economy.
By comparing these two sectors, John and Wade get a sense of where we are in the broader economic cycle. From their Strategic Trader update …
As you can see in Fig. 1 — a chart that shows which stock sectors tend to outperform during various stages of the business cycle — consumer discretionary (Stage 2) and consumer staples (Stage 5) are at opposite ends of the cycle.
By comparing these two stock sectors, we can see whether Wall Street is preparing for continued expansion or continued contraction.
When consumer discretionary stocks are taking the lead, we can be increasingly confident that traders believe both the economy and the stock market are doing well. When consumer staples stocks are taking the lead, we can be increasingly confident that both the economy and the stock market are doing poorly.
***So, what is this technical indicator telling us today?
In answering this to subscribers, John and Wade walk through a series of charts, showing what’s happened over the last few months.
In short, this indicator has shown an inverted “head-and-shoulders” bullish reversal pattern. Don’t get confused by the language. It’s simply means that traders appear to be regaining confidence in the economy and stock market.
That said, short-term market direction is a bit murkier. From John and Wade …
…we are now sitting at a key inflection point … The chart has been consolidating in a narrowing range for the past two weeks. If traders have enough bullish enthusiasm left for the stock market to recover, we will see it confirmed with a breakout to the upside and the completion of a bullish “pennant” continuation pattern.
If traders don’t have enough enthusiasm and the stock market is going to roll back over, we will see it confirmed with a breakout to the downside and the completion of a bearish pennant reversal pattern.
To follow this set-up yourself, John and Wade suggest monitoring two ETFS: the Consumer Discretionary Select Sector SPDR Fund (XLY) and the Consumer Staples Select Sector SPDR Fund (XLP).
If the ratio of XLY to XLP (discretionary to staples) expands, think of this as “more confident.” If the ratio shrinks, it’s “less confident.” What happens with this ratio over the next few weeks may give us helpful insight as to the broader stock market.
***Meanwhile, another one of our trading experts, Ken Trester, sees reasons to be cautiously optimistic
With decades of experience reading markets and charts, Ken is the editor of Power Options Weekly. This morning, he updated his subscribers with his most recent market analysis …
As you can see in the chart above, the S&P 500 index has risen and closed above its 50-day moving average for five trading days in a row now, which is a somewhat positive sign.
However, it’s just barely above resistance at 2,630. It’s helpful to think of resistance as not a single line on a chart, but more of a range, and that range is currently between about 2,630 on the low end and 2,670 on the high end.
For reference, 2,675 is the level where last Friday’s rally topped out, and we haven’t closed above that level so far in 2019. Therefore, my outlook right now is one of cautious optimism.
So, looking forward, be mindful of:
– John and Wade’s key S&P 500 support level of 2,630
– Whether the ratio of XLY to XLP is growing larger or smaller
– Ken’s key resistance range for the S&P of 2,630 – 2,670.
Here in the Digest, we’ll bring up updates as these key indicators give us more clues about market direction.
Have a good evening,
Jeff Remsburg
