Downside Price Rotation Dominates After Manufacturing Data
Our research team has been all over this longer-term Pennant/Flag setup and the potential for the breakdown in the US/Global markets. The US manufacturing data released today confirmed what we believed would be the outcome of the extended trade issues between the US and China – a moderate slowdown in US manufacturing. Couple that with a US Fed that is attempting to navigate very difficult economic developments, consumers headed into the Christmas season unsure of what lies ahead, the US political environment (almost complete chaos) and uncertainties with foreign markets and we have a perfect setup for “investor malaise”.
This is something we last saw after 9/11 and even earlier in 1990 when the US invaded Kuwait. With each of these events, consumers and investors entered a phase of moderate indifference/malaise in terms of attention put towards global economics and investing as well as a general unwillingness to actively engage in anything related to investing and finance related. It appeared that consumers and investors were just busy taking care of their lives, families, jobs and watching the “news cycle” as it seemed every evening something new hit the news-cycles to distract from the markets.
If this is the case with the new Impeachment proceedings, the US Presidential election event (2020) and geopolitical trade/finance issues in today’s markets, then we may be entering a period where capital will continue to shift into safe-havens, protective stocks (DOW and dividend-paying stocks) and attempt to shun the high-flying, high-risk technology, Biotech and heavy-equipment and other stocks that rely on a booming global economy. We have about 13 months to go before the November 2020 US Presidential elections and it appears we have a dramatically changing economic environment ahead of us.
If this downward price move continues as we expect, capital will move away from risk factors and into safe-havens, bonds, and blue-chip stocks as a method of protecting against valuation risks. The NASDAQ and technology stocks could get crushed while the VIX index
S&P 500 (ES) Daily Chart
This ES Daily chart highlights the new lower low produced by the downside price move on October 1. This new low confirms the bearish trend is currently dominating the direction and suggests price may attempt to target the 2880 level (first level of support) before possibly moving lower. Our researchers believe the ES is likely to fall 5% to 12% over this total downside rotation based on our Adaptive Dynamic Learning (ADL) predictive modeling system. If this happens then see what we think will happen to the price of the VIX. Thus, retesting August 2019 lows is really going to be a key setup to determine what happens next.
Dow Jones Daily Chart
This YM Daily chart provides an even more dramatic example of the new price low set up that continues to suggest further downside price action is in our future. Support near 26000 would be our first target level and ultimate support near 25000 would be our ultimate support level based on recent price rotation. Ideally, we believe the YM will move towards the 26000 level and find support rather quickly. Much more quickly than the ES and NQ – as we’ve recently detailed in our ADL predictive modeling research article.
NASDAQ Daily Chart
Because we believe the NASDAQ and the S&P stocks are more likely to experience a broader price rotation than the Dow Jones stocks, we believe that capital will begin a very dramatic and dedicate shift away from risk over the next 2 to 3+ weeks. This would suggest that certain S&P and Dow stocks/sectors could see some support setting up within a 3~5 week span – well before the NASDAQ stocks find any real support. It also suggests that Metals and Miners are likely to begin another rally higher over the next few weeks/months.
Ultimately, this will result in the VIX rallying much higher, as we suggested near 30+ days ago, and possibly targeting levels above 25 (initially), then possibly 35 as the capital shift extends. Once capital begins to pour out of risk and into safe-havens, the VIX could rally above 40 on a deep price downturn in the NASDAQ.
Concluding Thoughts:
If this downside rotation extended into the global stock market, we may see a much broader rotation of capital throughout the world as risk factors are heightened and credit/debt issues are pushed to the limits for certain foreign nations/corporations. This is likely to be a “shake-out” moment if the downside price move extends deeply.
Right now, we need to watch how the foreign markets will react to this new and how consumers and corporations address this manufacturing slowdown. Obviously, everything is not as rosy as one might think given the global trade and economic issues. But we believe this rotation is very healthy for the markets and if our ADL predictive modeling is correct, the ES and YM will recover near mid-November for a moderate Christmas rally for 2019. The NASDAQ/technology/Biotech sectors, though, may not be so lucky.
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