1st September - Beware the bounce in Stocks
01 September 2015
TECHNICALS:
S&P futures weekly chart
The S&P gives some comfort to both the bulls and the bears.
While there is a clear top formation in place, it has no compelling structure or measurable target on the downside.
For the moment the bull will have been disappointed on the breakdown through 2014 but satisfied that the band of support 1846/1891 has held, just as it did in the last sharp pull-back a year ago.
However, there is now significant resistance above the market above 2000, almost a full year’s price sideways action....
Shanghai Composite Daily chart
This looks poor.
There is a nicely formed continuation Bear triangle that was the catalyst for the break-down beneath the first important support beneath the market at 2400.
The minimum target for the Triangle ( just below 2000) has indeed been reached.
But on any rally from here there is powerful resistance to be overcome above the market at 2400
iShares MSCI Germany ETF daily chart
This is even more exciting for the bears.
A clear continuation bear Head and Shoulders has completed.
The recent bounce looks set to fail at the Neckline resistance.
And so the minimum move for the H&S pattern remains in play a long way down at 22.5.
Note that a move through the recent low will violate both the Prior Low at 25 and the long run diagonal support (from 2009) adding fuel to the bear fires.
FUNDAMENTALS:
The rally in stocks came to something of an abrupt end as concerns about China increased. The recent surprise currency devaluation began the rot, but as the Chinese stock market entered a period of precipitous selling, global equity markets sold off hard.
The fear was that a slowdown in China would slow an already tepid global economic recovery. Moreover, with the US Federal Reserve priming markets for a September rate hike, traders were worried that such a move would hit sentiment hard and drive stocks lower.
And when, in addition, there were briefings from policy makers in the Bank of England that a rate hike should be expected early in 2016, the environment for stocks quite suddenly became negative.
However, the market was thrown something of a lifeline mid-week last week when Fed policy maker Dudley placed a question mark over the need for the Fed to hike rates in September. He said “the case for a September rate hike may be less compelling than a few weeks ago”. This was clearly a nod in the direction of market turmoil driven by China.
But, no sooner had markets calmed than the release last Thursday of US Q2 GDP threw the whole debate about a Fed rate hike wide open. An upward revision to the GDP report was widely expected, but at 3.7% annualised the number was stronger than expected.
As traders fretted that the Fed would likely put domestic considerations first, stocks sold off once more.
The dilemma facing the Fed is surely this: US interest rates are virtually at zero and they have expanded their balance sheet enormously as a result of the three QE programs and as the economy recovers. So they are concerned that if they don’t begin normalising policy and their balance sheet now, albeit at a slow and gradual pace, they will be vulnerable if the economy really starts to motor, If then policy action was required, the moves would be greater and probably more damaging than if they were starting from a higher level of rates.
But the US is not immune from the global economy. Apart from the UK, the Eurozone and Japanese economies continue to underperform. In the case of Japan, it has underperformed for years.
All this, in addition to current concerns about China, (the worlds 2nd largest economy and largest exporter nation) adds up to a very delicate situation for policy makers in the US and UK. To get it wrong will obviously have negative effects on their own domestic economies. So is it wiser for the Fed and to a lesser extent, the Bank of England, to delay any intended rate hike until conditions, both economic and market are calmer? Afterall, global inflation is non-existent and likely to remain so with the sell-off in oil.
Equity markets are currently dogged by to big uncertainties:
Until these questions are answered, stocks are likely to remain vulnerable. The recoveries seen in the S&P, FTSE and DJEUROSTOOX50 in the last day or so may not last.
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7th September -Gold remains weak 
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