Technically Speaking For August 6

|
Includes: IWC, IWM, QQQ, SPY
by: Hale Stewart
Summary

Global manufacturing continues to be under pressure.

The tension in the trade war has escalated.

The markets rebounded after yesterday's sell-off.  But the overall trend is still bearish.

The latest data from Markit Economics continues to show a divergence between the service and manufacturing sectors. Japan's Service PMI dropped 1 to 52.8; new orders and employment rose while exports stabilized. China's Service PMI rose from 51.6 to 52; new business and employment were up. EU Service was positive -- the headline number was down 0.4 to 52.2, although new orders, employment, backlogs, and confidence were all higher. While the service sector's performance thus far has been able to sustain overall EU growth, that trend is under increasing pressure (emphasis added):

The service sector continued to sustain the expansion of the overall eurozone economy at the start of the third quarter, but there are signs that the scale of the manufacturing downturn is starting to overwhelm.

The RBA kept Australian rates at 1%. The bank's statement contained the following assessment of the global economy:

The outlook for the global economy remains reasonable. However, the increased uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy remain tilted to the downside. In most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. The slowdown in global trade has contributed to slower growth in Asia. In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.

There are numerous other sources citing weak global trade. Statements to that effect litter the most recent Markit PMI reports. Both the OECD and IMF made similar observations in their latest global economic outlooks.

The US-China trade war took an ugly turn for the worse (emphasis added):

The trade war between the United States and China entered a more dangerous phase on Monday, as Beijing allowed its currency to weaken, Chinese enterprises stopped making new purchases of American farm goods and President Trump’s Treasury Department formally labeled China a currency manipulator.

The US' declaration that China is a current manipulator is more symbolic than meaningful. There must now be an investigation that could last up to a year. And this is occurring when there is widespread agreement that China is no longer engaged in the act. China's response that it would no longer buy US agricultural goods will only hurt farmers who are already reeling from the trade war and inclement weather. Financial markets understandably sold off sharply on Monday as a result.

Let's turn to today's performance table: After yesterday's bloodbath, a bounce was exceedingly likely. That's exactly what we got today. Large-caps rallied about 1.5%; mid and smaller-caps less so. Also, note that the Treasuries were up modestly as well.

On Friday, I noted that I had changed my outlook to both short and long-term bearish. The price action over the last few days has confirmed that outlook. Let's start with the five-day charts: Today, prices moved through resistance forming a short-term uptrend. The chart is now right below the 200-minute EMA. Over the last five days, all rallies have been counter-trend. Three have failed. In contrast is the IEF, which printed a solid uptrend for the last four days. Today prices broke the trend and consolidated sideways.

The 30-day charts are bearish as well. The SPY chart shows the depth of the technical damage. Prices fell through support in the mid-290s and have printed several counter-trends as the index heads lower. The IEF stands in stark contrast to the SPY. The Treasury market has rallied strongly over the last few days and even printed a 30-day high at the close.

Obviously, the very negative trade background is not helping traders. Larry Summers summed it up best with this tweet:

I couldn't put it any better.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.