Trading Week Ahead (US) – 01-Sep-2019

Updated: Dec 6, 2019

The US indices (S&P 500, NASDAQ, DOW Jones), after enjoying years of steady bull run, are now showing signs of getting out of steam. There have been talks about looming recession by end of 2020, based on various red flags such as inverted yield curve, trade war against China and sharply falling yield rates. These have reflected in increased volatility in US markets, and have sent the prices of precious metals such as gold and silver on exponentially upward curve. Let’s look at where the markets stand.

Both SPY (SPDR S&P 500 ETF) and QQQ (PowerShares QQQ ETF based on NASDAQ100) had a steady uptrend from 2009 (with a few hiccups), until 2018 when significant correction happened. The average true range shot up and is held at much higher level than during the bull run. While the market is crawling up sine and has hit a couple of highs since, the trade volume is declining suggesting reducing commitment from the market participants. A cautious long investor would be looking at taking some money out by reducing position and booking some profits.

In the daily picture interesting bearish pattern is emerging. We see a bear flag in both SPY and QQQ.

After hitting all time high by end of July 2019, the market had a sharp fall losing about 8% in 4-5 trading days. Since then, during the whole August, market has been trading in very narrow range between 282-294, but with high volatility. Every day there had been large gaps at the open, and many of those gaps were closed three-four days later. It’s a suggestion of indecision, but at the end of the month we see a clear flag pattern developed. When we extrapolate the measured move for breakdown, we see the market has a potential to reach the demand zone near 275, which was the origin of last rally from where the market hit all time high.

To add to the confluence – we can notice that BC retracement is approximately 68% of AB move – a Fibonacci level that many market players are also watching.

A similar bear flag pattern is visible in QQQ.

What next?

Nothing can be certainly predicted. Technically - the long term trend is still up, in the short term the markets appear weak and we may expect the bear flag to work as shown. The fundamental data this week will be important trigger to move the market. On Friday we shall have non-farm payrolls and unemployment rate, followed by Fed Chair Powell’s speech on “Economic Outlook and Monetary Policy” in Switzerland. That will be the last public appearance from Fed before FOMC statement on 19th September. Given that a lot has been happening in the world lately, this speech and the statement later in the month hold significant importance to see what direction the market takes.

Stay tuned @