US Stocks Bull Trend Intact, But Increased Volatility Providing Concerns (Feb ’18)
A tumultuous time in Global equity markets.
In particular, investors have been focused on the US S&P500 SPX Index.
A steady march higher in US equity prices has given way to a sharp fall from the 2872.87 high of January. This fall has helped to unwind overbought momentum studies, and generated a short-term negative signal on the proprietary Tension Indicator.
However, despite prices falling 340 points, or 11.8%, in the space of just 2 weeks, momentum studies have not yet reached oversold areas.
This suggests downside risks could continue into the coming weeks, as money managers use any bounces to further reduce US equity exposure. Price action will also remain choppy, as the Average True Range, (ATR), a measure of volatility, jumps significantly higher.
Whilst prices come under near term pressure, the dominant question is
Has The US Stocks Bull Trend Ended?
Looking at the monthly chart, the dominant bull trend is still intact.
However, there are early signs of a corrective pullback developing.
As with the weekly chart, overbought momentum studies are unwinding and the weakening Tension Indicator is close to generating a negative signal. The sharp rise in the ATR also points to increased volatility.
Collectively, they suggest prices will remain choppy and under pressure into the coming months.
Focus will turn to psychological support at 2500 and the 2465~, (38.2%) Fibonacci retracement of the 2016-2018 rally, where consolidation could develop.
A close beneath here, however, will add fresh weight to already deteriorating investor sentiment, and point to a still deeper pullback.
This would also add pressure to turn the long-term quarterly charts.
In fact, a close beneath 2465/00 would turn the long-term charts neutral, and increase rhetoric from “a corrective pullback” to “a potential trend change.”
Subsequent losses would then open up lows down to the 2215, (61.8%) Fibonacci retracement, as money managers further reduce their exposure to US equities – and likely global equities in general – and explore new allocation opportunities.
(Perhaps risk-tolerant investors can begin to look at the Cryptocurrency space. The recent collapse in prices has helped to quell speculator frenzy. Whilst prices are expected to remain choppy, they could provide value for investors who are comfortable with this trading environment.)
In the midst of this sharp pullback in equity prices, there has been a sharp break higher in volatility.
Following a multi-month period of consolidation, the VIX has rallied sharply.
As oversold momentum studies unwind and the Tension Indicator also improves, price action is expected to further improve in the coming months.
If prices can close above psychological support at 20.00 at the end of 2018Q1, we are likely to be entering a period of heightened volatility.
Is it time for “The Greeks” to come marching back?
Whilst US equity markets have taken a battering in recent weeks, the long-term bull trends are still in place.
A close below 2465/00 at the end of 2018Q1, however, would add weight to price action, and turn investors more cautious.
Meanwhile, volatility is likely to remain high, as the VIX breaks away from recent multi-month range trading.