Market Update for Wed 7 Feb 2018
Many Asian markets which hit record highs continue to sell off. Japan fell as much as 6%, Hong Kong and Taiwan down 5%, South Korea 2.5%. Australia’s benchmark index S&P/ASX-200 closed down 3.42%, adding another AUDb57 to yesterday’s AUDb33 in losses.
XJO dropped a whopping 200+ points, the biggest one-day fall in more than two years. Prices sliced through all support levels and stopped at the familiar 5800 level. This level, we touted in October 2017 on the breakout and start of a new uptrend, will be retest at some point in future. It appears this is what is happening now. The price index and most price indicators and oscillators are now completely oversold and the drop was on climactic volume. A bounce can be expected. The Chart-of-the-Day shows a compressed Daily chart of the S&P/ASX-200 (XJO), showing nine years worth of data. The price index is plotted as a line on close while the lower pane shows a drawdown chart. While the speed and magnitude of the last two days look scary and caused a lot of havoc, a drop of 5% is not that uncommon as the chart suggests. It is drawdowns of 10% or more which mark major price bottoms in the price index. Prices are back at the demand line of the uptrend channel which started from the February 2016 washout low. Holding this level keeps the prospects open for a continuation of the long-term uptrend. Giving up 5800 support could keep the price index in a trading range. Bear markets don’t start with a bang. While we are not prophets nor in the prediction business, we don’t believe that prices continue to slide down from here but rather expect a bounce. The Daily time frame is now in a confirmed downtrend and Market Condition downgraded. A close below 5850 on Friday would turn the Weekly timeframe also into a confirmed downtrend and downgrade Market Condition further. For now, Market Condition is in Stage 2.
The NH-NL Index dropped to its lowest level in two years and is negative. Back then a major price bottom was in the making with the washout low on 10 February 2016. The magnitude of today’s drop in the Daily NH-NL indices renders the remaining readings meaningless. The Weekly NH-NL index dropped below its zero line. This is an Intraweek signal and will only confirm on the close on Friday. The negative divergences in both, the Daily and the Weekly NH-NL indices have worked themselves off with both, the price index dropping below its mean (moving average) on the Daily and Weekly time frame and the NH-NL indices dropping below their zero line. This is a much better condition for prices to recover without looming divergences building or in force. The New Highs – New Lows raw data show a compressed chart showing six years worth of data. New Lows expanded to a level not seen in more than five years and New Highs compressed to the lowest level in more than three years. Such huge spikes mark important price bottoms once stability in the market is restored.
The Secondary Market Internals are negative. The NH-NL Ratio dropped straight into an oversold condition while the Volatility Index spiked to a level not seen since the Brexit selloff in June 2016. Read about the condition of the Volatility Index when above its underlying futures contracts in yesterday’s report.
The Breadth Indicator remains negative. The McClellan Oscillator dropped to the lowest level ever since we started recording advancing and declining securities on a Daily basis at the beginning of 2014. This is a hopelessly oversold condition for the oscillator.
The Bottom Line. The price index, price indicators and oscillators as well as most Market Internal indicators reached a deeply oversold condition after today’s biggest one-day drop in two years. A bounce can be expected. Resistance is at 5925, the lower boundary line of the mid-2017 trading range. Prices reached the important 5800 support which needs to hold for the long-term uptrend to continue. Short- and Intermediate-term trends are down. We don’t think that this is the start of a bear market but expect more lateral movement which a topping process. Markets need to stabilize and normality be restored before more conducive conditions can be expected. Trading Mode is Protective.