Stocks: Has The Rally Already Halted Amid Growth Concerns?

The US equity markets have started 2019 with a bang, but that good run of form could be about to end. Global stock indices were trading lower this morning, with US index futures also pointing to a lower open on Wall Street when trading gets under there later.

Profit-taking is of course one reason for the weakness in equities today, given the extent of the recent rebound and especially since this week has been very quiet in terms of news flow and data. Investors are also concentrating on other macro events until the focus returns to Brexit when the UK Prime Minister lays out her plan B, by Monday latest.

One area of major concern for investors is weakness in China, where the economic growth has slowed down to ‘just’ 6.5%, the slowest pace since 2009. The slowdown of growth in the world’s second largest economy has been in part due to its trade dispute with the US, with the latter raising its import tariffs on Chinese goods arriving in the US amid accusation of intellectual property theft and unfair trade practises.

Although the two nations have started to work on resolving their disputes – which may explain the recent equity market rebound – cracks have nonetheless started to appear in China, with demand for high-end luxury goods, for example, falling. Car sales fell last year for the first time in more than 20 years, while Apple’s warning a couple of weeks ago about weak sales of its iPhone in China is another example.

So, the damage may have already been done and this could have a negative trickle down effect on the rest of the world, including the US economy. So, while a potential trade resolution could help to prop up the markets, when and if it happens, this could prove to be short-lived as by then the news may have already been priced in anyway.

While the fourth quarter US earnings results have so far been somewhat more positive than negative, bigger and more important companies will be publishing their results and their numbers and outlook could reflect our and other economists’ concerns about China.

h2 Macro view: S&P 500 hits key long-term resistance zone/h2

Meanwhile, from a technical point of view, the global and US stock markets may have already peaked last year, with the major global indices, including the S&P 500, breaking key support levels and forming repeated lower lows and lower highs. So, I wouldn’t be surprised if we do now see a sizeable pullback here after the recent recovery.

For one thing, the S&P does look overbought in the short-term outlook, especially in light of the big falls we witnessed at the back end of last year. The index is now retesting the key broken support zone in the 2603-2632 range, as can be seen on the monthly time frame. The index has already met with some resistance within this zone yesterday, turning lower from around 2625. If the sell-off at the end of last year marked the end of the bull trend, then this is where the next phase of the selling could potentially start.

h3 S&P 500 Monthly Chart/h3

h2 Bears need breakdown first before they regain control/h2

As mentioned, the index has now reached a massive area of potential resistance so we must first see a clean breakdown in the lower time frame charts before we turn bearish again.

On the daily time frame, one can clearly observe that the most recent low prior to the latest up move was made at 2567 on Monday. It is therefore this 2567 level that now needs to break for the index to create a lower low. Should this happen, then we could see another sharp sell-off that could potentially move the index, over time, below the 2018 low of 2315. However, there will be other key shorter-term levels, for example at 2521 and 2492, that could prevent that from happening.

Nonetheless, a break below that 2567 would tip the balance back in bears’ favour. For the bulls meanwhile, a clean break through the above-mentioned long-term resistance in the 2603-2632 range is needed if we are to see further gains in the near-term outlook. Given the above technical and fundamental considerations, we are doubtful that this scenario will play out. But of course, we could be reading it all wrong. So, let’s let the charts tell us what the next directional move will be, rather than preempting it.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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Written By: FOREX.com