The Charts Say We're Consolidating At Lower Levels (Technically Speaking For 3/5)
Summary
- The Reserve Bank of Australia observed that global growth will be lower due to the coronavirus.
- Former Fed President Yellen observed that the shock from the virus will be temporary.
- The moving averages of the index-tracking ETFs indicate prices will consolidate at lower levels.
The Reserve Bank of Australia cut rates 25 basis points earlier this week. Here are the bank's observations about the global economic situation (emphasis added):
The coronavirus has clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower than earlier expected. Prior to the outbreak, there were signs that the slowdown in the global economy that started in 2018 was coming to an end. It is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path. Policy measures have been announced in several countries, including China, which will help support growth. Inflation remains low almost everywhere and unemployment rates are at multi-decade lows in many countries.
Other central banks and bankers are issuing similar statements. (See the Fed's and The Bank of Canada's recent policy comments.)
Former Fed Chair Janet Yellen added her thoughts to the coronavirus discussion at a recent panel discussion (emphasis added):
“We could see a significant impact on Europe, which has been weak to start with, and it’s just conceivable that it could throw the United States into a recession,” Yellen said Wednesday at an event in Michigan. “If it doesn’t hit in a substantial way in the United States, that’s less likely. We had a pretty solid outlook before this happened -- and there is some risk, but basically I think the U.S. outlook looks pretty good.”
She did offer this hopeful comment (emphasis added):
Yellen did point out that economists have looked at what’s happened with past epidemics such as the SARS outbreak in 2003, and typically, there’s a short-term impact. “Longer-term, it seems to have relatively little influence, and I think many observers are hoping that will be true this time,” she says.
That's an important point. The virus is an exogenous shock that is hurting supply and which will hurt demand. But it won't last forever. The question is how long the shock will go on.
The labor market is one of the most important markets for Fed policymakers. The latest Beige Book contained very bullish observations about the jobs market:
Employment increased at a slight to moderate pace, overall, with hiring constrained by a tight labor market. Insufficient labor lowered growth for many firms and led to delays in construction projects. Several employers changed from temporary to permanent workers in order to attract talent, and firms made efforts to retain workers such as keeping seasonal workers on staff in the off-season. While employment grew across most sectors, manufacturers, retailers, and transportation companies reported lower demand for labor in some Districts. Wages grew at a modest to moderate rate in most Districts, similar to last period, and contacts expected wage growth to continue in this range. Firms reported that the tight labor market and minimum wage increases were putting upward pressure on wages. Companies also spent more on benefits, as the cost of benefits rose and as employers expanded benefits to attract and retain workers.
The overall trend is clear: there is diminished supply and high demand, which is causing the resource cost to increase. As the jobs market is one of the most important coincidental economic indicators, this is very good news.
There's been a lot of noise during the last few weeks. Let's lower the information din by looking at charts that strip out the daily noise and instead focus on the underlying trend, namely the exponential moving averages.
There's a great deal of important information above. There's been a huge spike in volume; just eyeballing the chart, you'll notice that recent volume is 4-5 times higher than the average for the last year. There's been a rush to sell shares, which means traders have been looking for a reason to sell. The 200-day EMA has turned sideways - which means a change in the long-term trend. This will continue as the shorter EMAs are all moving lower. Finally, the shorter EMAs are below the longer EMAs, which is a bearish alignment.
These trends become more pronounced with averages that track small companies.
The mid-cap 200-day EMA is now moving lower. Part of the reason is the 10-day EMA is below the 200-day EMA, which will pull the longer averages lower. The 20 and 50-day EMAs are also moving lower; the 20-day EMA is close to moving below the 200-day EMA.
The observations for the mid-cap EMAs apply to the small-cap EMAs.
The sum total of these charts as they're currently aligned is that the markets will settle at lower levels in the coming weeks. My analytical instincts tell me the 200-day EMA will be very important.
This article was written by
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Comments (5)
"I don't believe we'll see another financial crisis in our lifetime"LMAO!
SPY at 156-164 would take us back to tops of 2000 and 2008, which seems unlikely