Donald Trump is, to many, a divisive character and, ever since he won the US presidential election two years ago, it’s not been ‘business as usual’ in Washington DC. He is not the only element in today’s divided world, where politics, economics, wealth and inequality have scarred the landscape for a decade. Like other politicians and central bankers, he was quick to take the credit for stock market rallies in his first year; let’s see what they’ve got to say now that things have started unravelling.
To our readers, what’s more important is gauging whether the moves in the final quarter of 2018 are coming to an end and, if not, how far they might continue. We focus on four US indices because these peaked the last, Asian ones mainly peaking in the first half of this year and European ones over the summer, so recent Wall Street price falls feel more dramatic – making for punchy charts.
To keep things in perspective, Nasdaq and Dow Utilities are the only ones back to where they started the year; other American ones are off between 5 and 10 per cent. European ones dropped between 10 and 20 per cent from this year’s highs, many of which were well below 1999-2000 record highs. Asia, and China especially, suffered the biggest losses of between 10 and 30 per cent.
Unsurprisingly, North American indices share many technical features. All have seen big monthly swings throughout this year, as one would expect at market tops. Fifty-day moving averages have crossed below descending 200-day ones, known as a death cross, a widely-used signal that a new bear market has started. All have broken trend line support taken from interim lows in 2015 and 2016, although they still remain above that taken from 2009’s low, Dow Transports being the closest to it, Russell under a badly drawn version of the same.
The S&P 500, and more markedly the Nasdaq, picked up the pace since 2016, FAANGS the engine of the bull market. For this reason, very steep trend lines have, unsurprisingly, given way. At or close to lows set earlier in the year, all display quite dramatic potential, somewhat irregular, head-and-shoulder tops. We shall wait to see where they close at the end of this month for confirmation.
In terms of oscillators, price action since October has corrected what had been a long period where the RSI was overbought. It has also switched the MACD, in dramatic fashion, to a sell after two years’ worth of being in positive territory. Monthly momentum has turned, or is close to turning, bearish on all four indices, and they are trading below the weekly clouds of the Ichimoku charting system – another bearish sign.
Observed volatility picked up smartly from depressed levels, but remains well within the peaks seen on many occasions over the last six years. Volume has not been as high as one might expect, suggesting we are nowhere near a capitulation point. Finally, for fans of Elliott Wave theory, the rally since 2009 has five distinctive phases (unclear on the Nasdaq, mind you), three up with two corrections, where wave five is roughly a Fibonacci 161 per cent the height of wave one. I would pencil in a retracement of at least a third, maybe one half, of this whole rally.
