Society uses history as a means to greater understand our position in the present. This notion is used in all walks of life, including finance. The constant volatility over the past few weeks has left market players questioning future moves. The swings are driven by fundamental factors both micro and macro alike, but a technical lens provides market insight.
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The SPY will be used as a representation of equity markets. It is apparent through various touches that the market is respecting the continuation of Fibonacci levels from the 2007-2009 downtrend. Due to poor economic data as of late and utter distrust of political efficacy, the markets have been justified in a downturn towards the 200 week EMA and the 61.8% retracement level. Looking at the price movement from the previous downward move in late 2008; it seems as if there is statistical evidence that support levels could falter leading the market towards 95.03 levels. However, the 200 week EMA was not acting as support in the prior downturn. This could prove significant. Similarly, the longer term pattern creates a bearish signal through its inability to retrace the late 2007 highs..
Another interesting finding is the SPY price movement with relation to Andrew's pitchfork and lower trigger line. This trend indicator shows a magnified downturn with high volume that subsequently ended the uptrend. Although this does not represent the beginning of a new downtrend, it could mean future months of range bound movement.
The political intervention in mid 2010 seemed to quell the idea of another downtrend. The creation of the wealth effect and the relatively novel idea of quantitative easing pushed markets higher. This time around rhetoric and political maneuvering doesn't seem to be a catalyst. Growth is the objective on both sides of the Atlantic. It looks to solve economic woes as well as prospectively propel markets to new highs. The political leaders have the ability to enforce action that stimulates growth; but again, further rhetoric in the hopes of creating optimistic perceptions is not sufficient.
The MSCI World index is used to convey various messages. First, it looks to establish that world economies need tangible political action and growth as support. Next, it portrays the chart's reliance on previous Fibonacci retracements. The index was unable to break the 61.8% Fibonacci barrier; a task the SPY succeeded at. However, beyond the 38.2% level soon to be reached, it doesn't seem like technical support can further be relied upon. This is a bearish picture that too is driven by the world economic picture.
The above chart highlighting Germany's DAX performance with relation to the MSCI World Index portrays the eurozone's negative impact on its most impressive economy. The fact that the world economy may be slowing and the perception that Germany may have to eat the bills of its indebted neighbors has weighed on market sentiment. The German populace is unhappy and the picture is reflected in its equity market.
The 10 yr. yield chart represents the sudden capital inflow to risk off assets. The US bond market maintains its liquidity and riskless appeal even though its political situation is a negative externality on global markets. The current yield levels are comparable to late 2008 levels at the market bottom. Although this doesn't signal a current bottom, it does show that the outlook is grim. A 20-50 weekly EMA crossover further strengthens the downward move.
Another factor influencing bonds is the inherent risk of other safe havens. Currency safe havens are at risk of their central bank's intervention and gold seems at risk because it is navigating through uncharted technical territory. Gold sentiment also faces uncertainty due to analysts calling for pullbacks before further gains. Ultimately, these variables have influenced US Bonds current run.
Lastly, a smoothed out chart of "The percent of S&P 500 stocks above their 150 day moving averages" is used as a breadth indicator. It shows where the market is currently at, as well as previous levels. The current readings on the chart have only been witnessed during the technology bust in 2002 and the financial crisis of 2008-2009. The chart seems to have shown a similar move in 2010 before quantitative easing overrode; however, this time the markets have sufficiently tumbled.
The collection of readings above signify the reality of the current downward move. Although together they do not signal a recession, it is at least a sign that adjustments are in order. Equities are largely driven by sentiment. The charts, along with consumer confidence readings last week, tell the political leaders of both Europe and the US that legitimate action is necessary to offset current conditions
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.