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Update on the S&P 500

By David Morrison  |  29/10/2018 15:57
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Traders are having to cope with large intra-day moves on global stock indices. This has caused concern as it follows an extended period of low volatility

US and European stock indices flew higher on Monday in moves which, so far, have more than reversed Friday’s losses. This has helped restore some confidence. Many commentators expressed concern last week that global equity markets could have much further to fall. Today’s price action has calmed nerves to a degree, helping to convince some traders that the October sell-off will turn out to be a perfect ‘buy-the-dip’ opportunity. Yet there are arguments which suggest investors would be wiser to use any rallies to lighten up on their exposure to equities.

Shanghai Composite under pressure

Today’s rally came despite weakness in China’s Shanghai Composite. Overnight it lost over 2% as investors fret about the ongoing slowdown in Chinese economic growth while the yuan weakened further. The USDCNY pushed above 6.96 and is now within spitting distance of 7.00. This level is considered a ‘red line’ as far as China/US trade relations are concerned. If the yuan were to fall below here (the US dollar to rise above) then this would give President Trump an excuse to ramp up tariffs on US imports from China.

Merkel announces retirement

German Chancellor Merkel announced that she would not be standing for re-election as either leader of her Christian Democratic Party (CDU) in December, nor as the country’s leader in 2021. This follows on from yet another dismal showing for the CDU in state elections this weekend. The news sent the euro lower initially, but it soon bounced while the DAX shot up over 2%.

Share buybacks restart

The rally in US and European indices comes as markets were looking oversold. Analysts also pointed out that around 48% of S&P 500 corporations are now out of the earnings ‘blackout’ period. This means that they are free to indulge in share buybacks which has been one of the major drivers for the US bull market over the last few years. The earnings season is still ongoing, and investors continue to punish companies that miss analysts’ forecasts – particularly on the sales side. Alphabet and Amazon released disappointing revenue numbers after Thursday’s close. The latter also gave out some negative forward guidance for the fourth quarter.

Resistance around 2,700

As to the S&P 500: technically the first area of resistance remains around 2,700. As is shown on the chart, the area around here acted as support in June/July this year. It also roughly marks the 61.8% Fibonacci Retracement of the April/September rally, so it can be seen why it is significant. A break above here would mean that the next upside target was the 200-day moving average which comes in around 2,760/70, depending on which moving average you use. A break below increases the possibility of a retest of the April lows or even those from January/February this year.
 
 
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