Technical Analysis Of The Markets

January 25, 2019

Resistance Ahead - Following a-20% peak-to-trough correction in stock markets in December, we are now witnessing a powerful oversold rally. How far will it run? Is it a counter-trend rally in a new bear market or the beginning of a new leg higher in a still-ageing bull market? We are about to find out. Stock indices are approaching strong resistance overhead. The long-term 50-week moving average has started to coil downwards for all the major indices for the first time since 2016. This should cap the recent rally in stock markets. If somehow equities can power through the strong resistance overhead and turn the moving-averages back up, turning resistance into support, it will be some performance by the bulls.

New Highs & Lows On NYSE Back in Balance For Now - Yesterday, I discussed the relief rally underway in stock markets, which was fast approaching overhead resistance. I expect the long-term moving averages that are now coiling lower will cap the recent run. We should now expect a re-test of the December lows in the weeks ahead. IF those lows hold, or are taken out but the market then recovers, we have a set up to get long equities again. If the lows give way, then the downtrend will resume and cash will remain the favoured position. I monitor the number of stocks making new highs versus those making new lows on the NYSE each day. This helps me identify the strength of the overall trend of the market.

The Correction Begins - Last week I noted how many were taken aback by the sharp -20% plunge in global equities in December. A glance at some of the technical charts would have been enough to warn investors of the broad deterioration that was taking place beneath the surface. The information was in plain sight for those to cared to take a closer look. For example, the $OEXA200R captures the the percentage of stocks trading above their long-term moving average. It corrected sharply in 2018 despite the US equity indices making new highs in September. Today, the $OEXA200R has recovered from 13% in December last to 40%. So, despite the recent bounce, the majority of stocks (60%) trading in the S&P 100 Index remain in a bearish downward trend.

Sterling Strength - Despite all the noise that surrounds the ongoing Brexit talks, it is interesting that GBP has strengthened by  5% in recent weeks versus both EUR and USD. Any additional rally by GBP versus EUR and sterling will break below the consolidation triangle that has been in place since 2016. A meaningful rally could be starting. Relative to USD, a similar setup is taking shape. The chart on the right shows that GBP is showing relative strength versus USD and improving momentum, despite the 2018 decline in this relative currency pair. We still need to get through the next couple of months of political maneuverings as the 29 March deadline approaches, but I continue to believe an opportunity to add an allocation to UK assets may be close at hand.

Have a wonderful weekend everyone!

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Brian Delaney, CFA

Director, Secure Investments

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With gold stolen by Conquistador Francisco Pizarro from the Inca Empire in 1532, Spain financed its conquest of Europe.