S&P 500 - the technical picture

By David Morrison  |  14/03/2018 16:34

This article considers the fundamentals behind recent equity moves but argues that any change in sentiment ultimately shows up in the chart
US indices recover

At the end of last week, it felt as if there was nothing that could derail the bounce-back in US equities. Trump’s imposition of tariffs on steel and aluminium imports, the subsequent resignation of his chief economic advisor Gary Cohn, inflation concerns and the inevitable tightening of monetary policy from the Fed were all brushed aside as investors took the opportunity to increase their long-side exposure. Then a stronger-than-expected Non-Farm Payroll release together with a pull-back in Average Hourly Earnings provided the catalyst for a buying surge which saw the tech-heavy NASDAQ 100 end the week at a fresh record high and brought the S&P500 to well within 4% of its own all-time closing high, hit at the end of January.

Better fundamental news

So far, so good. But in the same way that a few analysts warned traders not to get too carried away by last month’s unexpected surge in Average Hourly Earnings (which proved to be a prescient warning given Friday’s pull-back), it’s wise to treat the strong payroll number with a bit of caution as well. Granted, the six-month rolling average has risen to 186,000 from 160,000. But there’s still a big question over why wage growth is so tepid, given that, at 4.1%, the Unemployment Rate remains at a 17-year low. The answer could well be that previously discouraged workers (who didn’t count in the prior data) are now coming back into the workplace and keeping a lid on wage demands. If so, then it could be a long time before US employees enjoy a significant bump up compensation.

Rally seems to be fading

This week has seen the US majors pull back from their best levels. Ostensibly, the reason has been Trump’s sacking of his Secretary of State Rex Tillerson. There’s certainly a worry that Tillerson’s replacement, Mike Pompeo, is far more hawkish in his worldview, citing China as a bigger threat to US security than Russia, and in his aggressive attitude towards Iran. Add in Trump’s insistence that Singapore-based chipmaker Broadcom drop its proposed bid for US tech giant Qualcomm, and it suddenly looks as if the US under the Trump administration is flexing its protectionist muscles and closing its doors to cross-border deals. We had more evidence of that this week after the White House said it is looking to reduce the annual US trade deficit with China by $100 billion, or around 26%.

News as an explanation

But there’s a danger of trying to explain away every market move by reference to news headlines and Tweets. For a start, such explanations are always “after the event” and often inaccurate or contradictory. And while headlines do drive short-term market behaviour, it takes considerably more than a news item (however big) to change market sentiment to such a degree that a multi-year uptrend morphs into a downtrend, or ends in a crash.

Shifting sentiment

Obviously, sentiment does change and sometimes it appears to shift overnight, although that’s seldom the case. That’s why it’s important to watch price action across key markets. A case in point is the S&P 500 which has been looking quite messy of late. However, it looks as if the index is forming an ascending triangle with resistance coming in around 2,785/90. Following an uptrend (which has certainly been the situation for the past nine years) an ascending triangle is typically seen as a bullish pattern which is often resolved by an upside break and a continuation of the trend. However, that’s not always the case and a break below the upwardly ascending line of support, particularly on increased volume, can also signal that the long-term trend is over. Looking at the daily chart below it’s fair to say that the situation is developing. We could soon see a resolution, although working out which way the index could break is the problem, particularly as a big move in US indices will affect everything. So, make sure you have stops in place whatever you’re trading.


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