Wednesday, June 20, 2018

Is the trade war correction over?

Mid-week market update: The fate of this market is becoming highly news dependent. Ed Yardeni recently stated in on CNBC that he has never seen a "president this bullish and bearish at the same time". The market wants to go up on earnings, but it has been held back by Trump`s protectionism.

Will stock prices rise or fall? Is the trade war correction over?

Unfortunately, my time machine is in the shop getting fixed. However, we can rely on technical and sentiment analysis to give us some clues. First and most encouraging was the market price action overnight. The Shanghai market stabilized and showed a minor gain after the horrendous drop Tuesday. The stock markets of China's major Asian trading partners also showed signs of recovery, and the markets in Hong Kong, South Korea, and Singapore successfully tested key support levels.

In addition, I had highlighted a technical pattern on June 10, 2018 (see Can America still lead the world?) indicating that the market had broken down out of a series of bearish wedges. Each breakdown was accompanied by either the VIX breaching or touching its lower Bollinger Band. Subsequent corrections have lasted roughly two weeks, and each pullback have been increasingly shallow, which is intermediate term bullish.

If history is any guide, and notwithstanding more trade war jitters, the market's weakness should end this week. Tactically, it is less clear whether we have seen the actual bottom of this correction just yet.

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