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Trade Recommendation: The S&P 500 is on the Verge of a Correction

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The stock market recently celebrated its eighth birthday on March 09, 2017. It is the second longest bull market in history, only second to the 113-month rally from October 1990 to March 2000.

  • The bull market is getting stretched on the upside
  • S&P 500 is overvalued both on a TTM P/E and a forward P/E basis
  • Economic expansion cycle warns of a fall within the next two years
  • Low volatility shows that the traders are not prepared for a fall
  • The chart shows a rising wedge, which is a reversal pattern

Will the bull market see its ninth birthday without seeing a 20% correction and take over the pole position, or do we see cracks developing?

A number of experts have been caught on the wrong foot calling a top of this bull market. Therefore, we will not delve into that territory. We are not interested in making outlandish claims, which are not tradeable. We want to put our money where our mouth is, without risking our house on it.

At the current levels, we see the first signs of weakness in the markets and expect a correction to 2320 levels in the near future. What is the basis for our assumption?

High Price over Earnings Multiple

The markets have developed a myriad of P/E ratios – the trailing 12-month P/E, the forward P/E, the inflation adjusted, the Shiller P/E – that it becomes difficult to correlate all of them to take a decision.

We, for ease of simplicity, will consider both the TTM and forward P/E ratios, as these give a good idea about the pricing of the markets from a medium-term perspective. The charts have been sourced from FactSet.

The chart shows that at the current price the markets are way above the average P/E multiples. There is nothing stopping the markets from getting pricier before a correction sets in. However, with every rise, the multiples will only tick higher and narrow the gap, which started the crash in end-2007.

The stock markets are forward looking, hence, a forward P/E will be a better yardstick for valuation.

However, even if we consider the forward estimates of growth, the market seems to have priced in most of it. Here too, the index is ruling above the 5 and 10-year average forwards 12-month P/E.

With the two charts above we have been able to establish that the S&P 500 at the current levels is pricey – though not in a bubble. Such high valuations leave only a small window for surprises. With any major upheaval, the traders rush to the exit can start a deeper correction.

Economic Expansionary cycle Tells Us to be Careful

Currently, there is very little that can be pointed as being negative for the economy – strong labor markets, high confidence levels, strong earnings projections, low interest rates, etc. However, a study of business cycles done by the National Bureau of Economic Research (NBER), the official arbiter of U.S. shows that we should be careful.

Since 1945, the US economy has witnessed 12 expansionary cycles – including the present one. The average age of those cycles has been 58.4 months, while the current one will complete 96 months. There have been only two cycles that have exceeded the present one – the one from 1991-1969, which lasted 106 months and the other from 1991-2001, which holds the record as the longest one for 120 months.

Though at the first instance one can argue that there is still room for the economy to extend the cycle. Certainly! But let’s see how did those two cycles end.

The S&P 500 peaked in November 1968, a month before the expansion reached its ninth year. The S&P 500, thereafter, dropped 36% by the spring of 1970. Post the fall, the following three-year and five-year returns were an abysmal negative 1.7% and negative 6.1% respectively.

In the 1990s, the economy entered its ninth year of expansion in March 1999 and the S&P 500 celebrated it with a 17.5% return over the next twelve months. However, it was followed by a crash and dismal three-year and five-year returns of negative 10.8% and negative 12.45% respectively.

Hence, the economic expansion cycle is raising a red flag for the next two years.

Low volatility shows that market participants are lax

These days, nothing seems to worry the markets. The market participants are confident that any fall is a good buying opportunity, which has sent the VIX – the US equity fear gauge – to the lowest in a decade, though the global economic policy uncertainty is at elevated levels.

However, this is a dangerous situation when traders concentrate only on the returns, ignoring the risks involved. BofA Merrill Lynch said that the traders are piling on the inverse VIX exchange-traded products (ETPs) linked to the CBOE Volatility Index, which bets volatility to remain low for long.

“A sudden shock to U.S. equities could pressure those invested in such strategies to short cover, thus exacerbating the rise in volatility,” the bank says, as reported by Reuters.

Middle East tensions, North Korean misadventures, Chinese debt problems, central bank withdrawing stimulus – any of these can cause a scare that can increase the volatility and bring the markets down.

Risk to our analysis

The market conditions are benign for the rally to continue further. If the S&P 500 goes on to hit new lifetime highs and sustains above 2453.8 levels for three days, it can continue moving higher till the 2480-2500 levels. A market can remain overvalued for an extended period of time.

Shorting the markets is an advanced technique, which should only be used with proper stop losses. The risk on the upside is theoretically unlimited. Hence, please maintain the stop losses mentioned in the analysis and only enter the trade once the said levels are reached.

What do the Charts Forecast?

The index is rising in a rising wedge pattern, which is a bearish formation. This setup comes into play on a breakdown from the trendline support. Until then, the S&P 500 can continue rising within the wedge. Hence, we shall wait for the price to break and close below the wedge – below 2400 levels – to initiate our short position.

On the daily charts, we find that the index is rising in a channel. The support zone on the index is between 2400-2420. If the index breaks this support zone, it is likely to fall to the channel support line at 2320 levels, which is also a significant support. We expect the index to find a strong support at these levels.

Hence, our short position will be taken at 2395 with a stop loss of 2455 and a target objective of 2320. We risk 60 points for a gain of 75 points. Once we enter our trade, we shall try to lower our stop loss and trail it to reduce our risk.

Traders can use the ProShares UltraPro Short S&P 500 ETF (NYSEARCA: SPXU) to initiate the short positions. As this is an inverse ETF, please buy it at the existing value when S&P 500 hits 2395 levels. We shall sell our position at the existing level when the S&P 500 hits 2320 levels. Once we enter the trade, we shall keep the lows as the stop loss.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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4 Comments

4 Comments

  1. jedadoo

    June 29, 2017 at 7:43 am

    How will this affect the cryto market? We haven’t seen a stock market downturn since it’s existed. Does it follow the same pattern as the stock markets during past corrections?

    • fkohist123

      June 29, 2017 at 11:30 am

      I would think alot of the small-cap cryptos will suffer from this if their revenue models depend on adoption of their blockchain solutions by industries. Think Civic and the likes: they will need companies to sign up in a recession where cash is scarce.

      Most small-cap crypto issuers are start ups themselves and their growth could be suppressed in a general recession. On the other hand BTC could serve as a hedge seeing as it’s volatility is converging to more stable levels.

    • fkohist123

      June 29, 2017 at 11:30 am

      I would think alot of the small-cap cryptos will suffer from this if their revenue models depend on adoption of their blockchain solutions by industries. Think Civic and the likes: they will need companies to sign up in a recession where cash is scarce.

      Most small-cap crypto issuers are start-ups themselves so their growth is vulnerable to suppression aswell. On the other hand BTC could serve as a hedge seeing as it’s volatility is converging to more stable levels.

  2. Rakesh Upadhyay

    June 29, 2017 at 5:39 pm

    jedadoo,

    A risk-off trade in the S&P 500 will give us a better idea whether traders turn to cryptocurrencies as an alternate asset class? If even a portion of the money that leaves equity markets enters into cryptocurrencies, we should see the uptrend continue.

    On the other hand, if the market perceives cryptocurrency investments as risky and there is a risk aversion across the board, then we might see correction set in.

    Difficult to predict, as there is no precedence and cryptocurrencies are still emerging as a new asset class.

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Altcoins

Tron Price Analysis: TRX/USD Bulls Hunting for a Potential Charge Back Above Broken Critical Trend Line

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  • Tron bulls continue to push the price north maintaining a firmer path of recovery.
  • TRX/USD has gained a significant 10% over the past four sessions, moving to its highest level in five days.

TRX/USD: Recent Price Behavior

The TRX/USD bulls have been enjoying some upside relief over the past few sessions now, picking up much pace in the session on Monday. The price managed to move to its highest level  in over seven sessions. Over the past four days, Tron has gained just shy of 10% as the price looks set for recovery following a breach last week of critical support.

An ascending trend line initially supported TRX/USD to the upside, providing exceptional comfort in its move north. The running support had been in play since the back-end of December 2018; however, after a decent run, the bears managed to force a breach. Sellers were able to regain control after the move below, to then see four consecutive days of selling, dropping around 10% in total.

Between 14-15th February, TRX/USD managed to find its feet after what could have very much been a free-fall to the deep south. Daily support came into play around $0.023550, which has provided needed comfort on several occasions already this side of the year. The recovery has been in play since this decent bounce occurred.

Tron Crypto Card

TRON recently detailed more information about its upcoming crypto card. The date of pre-order for the GRID X BitTorrent crypto card is going to be live on 18th February 18 2019 at 8 PM UTC. The GRID crypto card will be a prepaid card that can be topped with TRX in three amounts of 15,000, 50,000 and 100,000. Holders of the cards will be rewarded with BitTorrent (BTT) tokens as part of monthly BTT airdrops.

GRID will be one of two crypto cards built via the Tron network. The first, TronCard, was introduced as a tangible TRX wallet. Both TRX and TRC10 tokens can be stored on the TronCard similarly to a virtual wallet. These mentioned tokens are tokenized assets which would be leveraged via decentralized applications (dApps) via the Tron Network. A QR code feature can also be scanned by users for access to the public key. A physical card will then be able to integrate with the virtual wallet.

Technical Review – TRX/USD

TRX/USD daily chart.

The major challenge for the bulls as detailed above is seen underneath the breached ascending trend line; this is tracking at around $0.027500. Should the bulls manage to break back above this prior acting support, then expect a strong wave of buying pressure to come into play. Further to the north, eyes will be on the $0.03000 area. TRX/USD has not comfortably traded above this price region since August 2018. Once broken down, there isn’t too much in the way of a return back up to $0.04000 territory.

Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 124 rated postsKen has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.




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Analysis

Crypto Update: Ethereum Leads Second Phase of Rally

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The major cryptocurrencies are all significantly higher today amid the US market holiday, with most of the top digital currencies also hitting their highest levels in a month. Today’s leaders also took out the highs set during the Litecoin-led spike 10 days ago, and the new swing highs mean that the counter-trend move continues. The negative long-term forces a

Our trend model is still on short-term buy signals in most cases, with the relatively weak Ripple still being the most important exception, but for now, the bearish long-term picture is unchanged, and traders should still use strict risk management strategies, as, despite the rally, bear market rules still apply. That said, investors could hold on to their smaller speculative positions, since the short-term break-out patterns in the segment remain intact, despite the still dominant negative long-term forces.

ETH/USD, 4-Hour Chart Analysis

Ethereum built upon its recent short-term relative strength, surging past the $120 and $130 resistance levels, outperforming its closest peers and leading the way higher for the whole segment. With the new swing high, a new short-term uptrend is established, and our trend model remains on a short-term buy signal, but the long-term trend remains bearish.

The long-term outlook is still negative for ETH, but the coin could test the $160 resistance level, which marked the top of the previous counter-trend move in the coming days. The coin is currently trading near the $145 resistance level, and although it’s slightly overbought from a short-term perspective, the next resistance level could be reached in the coming days.

BTC/USD, 4-Hour Chart Analysis

While Bitcoin has been slightly lagging behind Ethereum during the current rally, it not just recaptured the $3600 support/resistance level, but also managed to rally up to the next key zone near $3850. BTC remains on a short-term buy signal in our trend model despite its relative weakness, but from a long-term perspective, it’s still in a clearly bearish setup.

With that in mind, investors should still expect a move towards the $3250 and $3000 support levels following the current counter-trend move, but traders could still hold smaller, speculative positions in the coin. Further strong resistance is ahead between $4000 and $4050, while below $3600, support is found just above $3450.

XRP/USDT, 4-Hour Chart Analysis

Ripple continues to be relatively weak compared to the broader market, and although it topped the $0.32 level amid today’s broad rally, it’s still only neutral in our trend model even from a short-term perspective. Also, the long-term setup is still hostile for bulls, and the test of the $0.28 and $0.26 levels still seems likely in the coming weeks, with strong resistance levels also ahead neat $0.3550, and $$0.3750.

Litecoin Hits Marginal New High as EOS Soars

LTC/USD, 4-Hour Chart Analysis

LTC haven’t been able to retain its leadership during today’s move, and although it scored a new marginal swing high, ending the short-term correction, the momentum of the current upswing is not convincing. Should LTC form a failed break-out pattern, our trend model will switch to neutral, but for now, the currency remains on a buy signal.

From a long-term perspective, Litecoin is still clearly in a bearish trend, so traders and investors should only consider short-term positions, but for now the break-out remains intact. The next level of resistance is ahead near $51, while is now found near $44, $38, and $34.50.

EOS/USD, 4-Hour Chart Analysis

EOS was also among the relatively stronger coins during the recent week, and after a failed move, today it surged to a significant new swing high, hitting the $3.50 resistance in the process. Our trend model remained on a short-term buy signal, during the recent consolidation, and although traders could take some chips off the table near the $3.50 level, the short-term trend is now bullish.

That said, the bearish long-term forces are still dominant in the market of EOS, and although the coin might test the $4.50-$5 zone, odds still the retest of the bear market low near $1.55 in the coming months. That said, traders could still to their short-term positions, following strict risk management rules, with support now found near $3, $2,80, and $2.55.

Featured image from Shutterstock

Disclaimer:  The analyst owns cryptocurrencies. He holds investment positions in the coins, but doesn’t engage in short-term or day-trading, nor does he hold short positions on any of the coins.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 466 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Analysis

Euro Obscured By Clouds

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

EURUSD got much cheaper last week. For instance, on February 15th the pair reached the lowest levels since November 2018. The local bottom is now at 1.1233. By the end of the week, the major currency pair reached some kind of stability, but the Euro doesn’t look too strong even though economic numbers from the U.S. weren’t very impressive.

The key reason why the Euro plunged was the European Central Bank and its representative Benoît Cœuré, who said that the slowdown in the European economy growth turned out to be more global and much worse than expected. According to his estimations, the inflation in the Area would remain weak, and that’s why one shouldn’t exclude a possibility of a new program to support the European economy.

It’s not a good signal for the Euro Area and its currency. First of all, if Cœuré is allowed to talk about this, then this issue is very important for the regulator. Secondly, the ECB only recently closed its QE program and said that the Euro Area’s economy would no longer require any support. Discussing other possible tools and mechanisms, such as TLTRO (targeted longer-term refinancing operations), indicates that the European economy is starting to experience first signs of a slowdown, which is confirmed by recent statistics. However, in reality, things may be much worse.

In this light, weak readings from the U.S., such as as December retail sales (-1.2% m/m, much worse than expected) and January Industrial Production (-0.6% m/m, neutral market expectations) were out of investors’ eye. It’s bad for the USD, but the current situation with the Euro is much worse.

From the technical point of view, EURUSD is breaking the current descending tendency in the H4 chart and starting a new correction. Why is it possible to talk about growth right now? First of all, there is a convergence on the MACD in the H4 chart. Secondly, the price has broken the resistance line of the previous two-week downtrend. As for possible targets of this correction, they may be at 1.1341 and 1.1374 (38.2% and 50.0% fibo respectively). The key support level is the low at 1.1234.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 30 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




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