Recently I have been investigating the state of equity markets. For the last month US and UK indices have been somewhat directionless. Although they have retreated off highs they have also found, what look like solid levels of technical support.
However it looks to me like the situation is weakening.
I have been experimenting with a new system I am developing, keeping a close watch on price and volume movements. My idea is very much in its infancy, but the historical testing I have done indicates I could be onto the start of something.
It is a bit early to talk specifics about this, but at the moment markets are definitely looking weak. The pace of selling seems to be accelerating, while the price movements are pointing down.
I lack, in my analysis at the moment, the ability to examine individual stocks so am having to rely on index views, but as I say things do look weak.
Of course it is always dangerous to fight the overall trend. While I am extremely bearish on the outlook for the global economy, I am still bullish on financial instruments thanks to the sustained momentum liquidity will continue to provide. So with this in mind, had I any money at the moment, I probably wouldn’t short stocks just yet, as I would like to see a break through support and confirmation that a correction is underway.
The following chart helps illustrate how interesting the situation is. Long-time readers of this column might recognise this as a MIDAS chart of the S&P500.
This chart shows us to clear things. First the value zone for Support Level 2 is at about 1265:1275. The index is now at or near this. Second the value zone for Support Level 1 is at about 1115:1125.
If prices break then a correction down to S1 looks feasible. At this level prices will look extremely attractive, subject to conditions, as this level has already been confirmed in the run-up of the last two and a half years. If, on the other hand, the price rallies, then a new high should be reached in the current bull market.
Such are the tailwinds facing global markets I would not be at all confident going long at the moment, but equally I would like to see more confirmation that a correction is underway.