Sunday, 11 September 2016

Technical Analysis of 09 September Stock Market Plunge

 The Short Term View 

S&P 500 Chart as of 9 September
S&P 500 Chart as of 9 Sep (click chart to enlarge)

Since mid July, the price has been moving sideways with an ever so slightly upward trend. But the MACD and RSI are clearly falling, showing signs of negative divergence. So we can't say that we don't see this drop coming at all. Not to mention that September is the worst month for stock prices.

The drop stopped at 2130 support (shown as orange line in these 2 charts).

In the short term, we still have the price above the support of the uptrend line (in blue) that's drawn from the bottom in Feb in these 2 charts. So there's room to fall before reaching this support line. If this support fails, things wouldn't look good in the short term. If this support holds, it's business as usual.

Some would describe this as inverted scallop, which is a bullish pattern, if it playing out by bouncing off the uptrend line and exceeds the 2185 level. If prices drop below this uptrend line, we don't have a scallop. We have a dead scallop. If prices bounce off the trend line and fall back from 2180, we have a false breakout.

 The Longer Term View 

S&P 500 Chart as of 9 September
S&P 500 Chart (click chart to enlarge)

In the longer term, there's not too much technical damage had been done to the chart on last Friday. The 50 dma (in red) has hardly changed its direction and it's still above the 200 dma (in grey). In other words, we're still in a bull market, technically. In fact a strong bull market, albeit a nascent one.

Even if the price falls to the uptrend support line, it wouldn't turn the direction of the 50 dma from pointing upwards to pointing downwards.

It will take more price fall today than at the time of Brexit to produce the same technical damage as the Brexit plunge because the technical is stronger today than back in June when Brexit occurred.

If the price continue to tumble down to the same level as Brexit bottom, then even the long term view would turn more negative. But we're not there, YET. Far from it.

So we'll have to wait and see what happen to the price next couple weeks. A very critical few weeks for the long term view of the chart.

 The Fundamental View 

Hospital drip
Just what the doctor ordered: the drips of liquidity

In term of fundamental valuations (e.g. market p/e ratios), the market should be some 25% below this level to get to historical averages. The S&P p/e ratio based on GAAP earning is about 21 at the moment. If it's below 10, it's considered cheap or oversold. If it's 20 or above, it's considered expensive or overbought. So 15, being the middle of the 2 high and low level, is considered fully value, from a historical perspectives.

But the unprecedented central banks' liquidity around the world (not just the Fed) keep the stock market afloat at this level, and beyond. A very low yield environment justifies this historical high S&P p/e ratio. But we have really never been here, historically.

It's the hawkish tone of easy monetary policy that caused this drop. These days, the markets are so heavily dependent on the drips of easy money that any talk of removing it would cause the patient to have a bit of heart attack. Last Friday, on 9 Sep, we saw how the patient clutched its chest, screaming in pain, showing the Fed what happens when they only hinted the reduction in the level of the drips. This is understandable. Since the markets are on life support of the drips, without it, it would die.

Apart from the hawkish tones, there was a steep drop in crude prices. This is also an important contributing factor.

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