The SPX Is On The Cusp Of Correction
The global stock markets are under a lot of pressure right now. It all stems from the Trade War and the uncertainty surrounding global economic activity. The reason for the correction is going to be earnings. Earnings are what drives the market to new highs, when earnings are on the rise the market is on the rise and vice versa. In the year’s prior to 2018 the SPX hit new all-time after another for months on end due to increasing EPS outlook. The outlook for EPS peaked last year and has been in decline ever since. Sure, the outlook for growth is still positive… once we get past this quarter … but the underlying causes of EPS shrinkage remain.
A look at the weekly chart shows an index in a wide and volatile secular trading range. This range began in early 2018 and may last for at least another year or two before playing out. The underlying cause of the consolidation is not the trade war, far from it, but a shift in demographics that has Baby Boomers getting out of stocks. A closer look at the weekly chart shows an index that may already be topping out. The index is forming a potentially bearish double-top formation and that is confirmed by the indicators. Both MACD and stochastic have made bearish crossovers in tandem with the price pattern and that is not a signal to be ignored.
The daily chart is a little less bearish but only just. It is set up in what may be a bullish signal if not for the previous price action. Not only is the index showing the long-term double top, the surge in price produced by the “partial trade deal” was met with sellers. That day of trading formed a doji candle that to me spells doom for anyone hoping for a trade-deal inspired rally. I could be wrong. Oh yeah, that bullish signal is just a set up to fire a bearish signal assuming the market is about to fall. The key level to watch now will be 2950 and the short-term moving average. A fall below there could bring out the bears and send the index down to retest deeper support levels. My targets for support are at 2,950 and 2,875. If those are broken the index could get pushed down below 2,800.