On Friday, the US dollar fell against a basket of major currencies. The dollar index (#DX) closed in the negative zone (-0.59%). This week, investors will follow the statements by Fed officials. Richard Clarida, Fed Vice Chairman, will speak at the Washington DC Economic Policy Conference on Tuesday, at which International Monetary Fund’s Chief Economist, Gita Gopinath, and President of Federal Reserve Bank of Cleveland, Loretta Mester, will also give a speech. Financial market participants monitor any news and announcements about the coronavirus.
On Saturday, financial officials from the 20 largest economies in the world called for a coordinated response to the outbreak of coronavirus. The International Monetary Fund (IMF) forecasts that coronavirus will reduce China’s GDP growth this year to 5.6% and reduce global GDP by 0.1%. On Sunday, China reported a decrease in the number of new cases again. However, there was an increase in cases in other countries. Thus, 160 new cases of the disease were recorded in South Korea, currently, more than 760 cases were registered, in Italy – more than 150 cases, and in Iran – 43.
The “black gold” prices are declining. Currently, futures for the WTI crude oil are testing the $51.35 mark per barrel.
Market indicators
On Friday, there was the bearish sentiment in the US stock market: #SPY (-1.03%), #DIA (-1.04%), #QQQ (-1.92%).
The 10-year US government bonds yield fell sharply. At the moment, the indicator is at the level of 1.38-1.39%.
The Economic News Feed for 24.02.2020:
– German IFO business climate index at 11:00 (GMT+2:00).
By TheTechnicalTraders – Quite a bit of information can be gleaned from the US Treasury Yield Curve charts. There are two very interesting components that we identified from the Yield Curve charts below. First, the bottom in late 2018 was a very important price bottom in the US markets. That low presented a very deep bottom in the Yield Curve 30Y-10Y chart. We believe this bottom set up a very dynamic shift in the capital markets that present the current risk factor throughout must of the rest of the world. Second, this same December 2018 price bottom set up a very unique consolidation pattern on the 10Y-3Y Yield Curve chart. This pattern has been seen before, in late 1997-1998 and late 2005-2008.
The reality of these two patterns setting up in the Yield Curve charts suggests that the US and global markets are going to experience a surge in volatility and a very real potential that the US and global markets will contract over the next 6 to 24 months. Within about 3 to 6+ months of these patterns setting up, one of two separate outcomes typically takes place.
A. A continued US stock market price advance takes place pushing the Yield Curves lower and ultimately setting up a massive stock market top formation.
B. A moderate price peak sets up where the Yield Curve levels begin to rise from these current levels while the US and global stock markets begin a moderate correction phase – eventually leading into the possibility of a massive price collapse.
Our research team believes the deep price rotation near the end of 2018 set up a very unique capital shift event that took place within the global markets. Currently, there is well over $75 Trillion in the US and global markets. This capital has become enough of a force in the global markets to act as the “moon and the tide”. In a way, this capital, and the search for profits and safety, has propelled the global markets into a very fragile position.
This total amount of capital, in combination with the derivative markets and global credit markets, presents a significant risk for global central banks and nations. Many foreign nations have pushed their debt levels to well over 100% of GDP. Still, even more, have engaged in reckless lending and shadow banking practices that engage a further level of risk to the global markets. Global central banks have taken on excessive debt levels and acquired assets after 2009 in order to help stabilize the global markets. The combination of all of these facets of new capital, risk, and assets add a new dynamic to historical patterns in the Yield Curves.
Even though the patterns are similar in structure, the risks are far greater than in 2000 or 2008. Before, the Central Banks were like a ship navigating the Tides of the seas. Now, the Central Banks have become the Tides and the Moon – they are essentially an omnipresent force in all levels of assets, capital, risks, and contagion.
We believe the 30Y – 10Y yield curve may move slightly lower if any type of reprieve or complacency continues throughout the global markets that risk is not a factor going forward. This would suggest that the US stock market may continue to move a bit higher – possibly seeing the DOW breach the $30,000 level. Otherwise, we believe the Yield Curve may continue to climb suggesting that a global market peak is setting up and a price reversion event is beginning to take place.
This 10Y – 3Y Yield Curve chart highlights the potential for a brief collapse in this level to below ZERO, yet it is not necessary at this point in time to confirm a potential major market peak. Ideally, the future of the US and global stock markets depend on how these yield curves react at this juncture in time. A deeper move to levels below ZERO will suggest a broader market peak is setting up. A rally from these levels would suggest the peak has already set up and that real risk and fear are entering the global markets.
The NQ setup an Engulfing Bearish pattern after a very impressive rally from moderate rotation in December 2019. We highlighted the potential that the US markets are rallying to a peak in a number of research articles recently. The one we’ve included, below, is an excellent example of this type of research.
As we’ve been suggesting for many months, this is the time for skilled traders to become “cautious long traders”. This upside move could end in a very violent manner as the Moon and Tide shift suddenly as fear and central bank paralysis setup in the markets. We urge all our friends and followers to prepare for this eventual setup and to understand the total scope of this omnipresent capital/debt event. This time will certainly be different because Central Banks have become banker, holders, guarantor and leveraged participants in the future outcome.
Our suggestion is to plan to setup your portfolio so you have sufficient cash in reserve in the event of an unexpected market decline. We also suggest proper protection/hedge investments, such as precious metals and metals miner ETFs. Currently, this single Engulfing Bearish pattern is not enough of a trigger to warn of any immediate action for traders – but the Yield Curve charts are clearly showing us the markets will either continue to rally to an ultimate peak or begin to setup that peak very quickly from current levels.
Think of it this way, we know the music will likely stop at some point in the near future, we just don’t know exactly when it will stop. So, we have to prepare for the scramble for the chairs when it ends.
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On Friday, the EUR/USD currency pair moved away from three-year lows. Quotes updated local highs. Financial market participants have begun to fix greenback positions partially. Investors are still concerned about the spread of coronavirus outside of China. At the moment, the local support and resistance levels are 1.08000 and 1.08300, respectively. A trading instrument has the potential for further correction. We expect important statistics from Germany. We recommend opening positions from key levels.
The Economic News Feed for 24.02.2020:
At 11:00 (GMT+2:00), German IFO business climate index will be published.
Indicators do not give accurate signals: 50 MA has crossed 100 MA.
The MACD histogram is in the positive zone, but below the signal line, which gives a weak signal to buy EUR/USD.
Stochastic Oscillator is in the oversold zone, the %K line has crossed the %D line. There are no signals at the moment.
Trading recommendations
Support levels: 1.08000, 1.07800
Resistance levels: 1.08300, 1.08650, 1.09000
If the price fixes above 1.08300, further correction of EUR/USD quotes is expected. Movement is tending to 1.08600-1.08900.
An alternative could be a decrease in the EUR/USD currency pair to 1.07800-1.07500.
The GBP/USD currency pair
Technical indicators of the currency pair:
Prev Open: 1.28796
Open: 1.29448
% chg. over the last day: +0.70
Day’s range: 1.29338 – 1.29543
52 wk range: 1.1959 – 1.3516
GBP/USD quotes have been growing. The trading instrument has updated local highs. Currently, the British pound is consolidating. The key support and resistance levels are 1.29300 and 1.29800, respectively. The technical pattern signals a further correction of the GBP/USD currency pair. We recommend opening positions from key levels.
The publication of important economic releases from the UK is not planned.
Indicators do not give accurate signals: the price has crossed 100 MA.
The MACD histogram is in the positive zone, but below the signal line, which gives a weak signal to buy GBP/USD.
Stochastic Oscillator is in the neutral zone, the %K line is above the %D line, which indicates the bullish sentiment.
Trading recommendations
Support levels: 1.29300, 1.29000, 1.28500
Resistance levels: 1.29800, 1.30150, 1.30600
If the price fixes above the resistance level of 1.29800, further growth of GBP/USD quotes is expected. Movement is tending to 1.30150-1.30500.
An alternative could be a decrease in the GBP/USD currency pair to 1.29000-1.28700.
The USD/CAD currency pair
Technical indicators of the currency pair:
Prev Open: 1.32587
Open: 1.32508
% chg. over the last day: -0.26
Day’s range: 1.32430 – 1.32839
52 wk range: 1.2949 – 1.3566
There is the bullish sentiment on the USD/CAD currency pair. The trading instrument has set new local highs. Loonie approached the resistance level of 1.32900. The 1.32600 mark is already a “mirror” support. USD/CAD quotes have the potential for further growth. We recommend paying attention to the dynamics of “black gold” prices. Positions should be opened from key levels.
The news feed on Canada’s economy is calm enough.
Indicators signal the power of buyers: the price has fixed above 50 MA and 100 MA.
The MACD histogram is in the positive zone and above the signal line, which gives a strong signal to buy USD/CAD.
Stochastic Oscillator is in the overbought zone, the %K line has crossed the %D line. There are no signals at the moment.
Trading recommendations
Support levels: 1.32600, 1.32400, 1.32150
Resistance levels: 1.32900, 1.33250
If the price fixes above 1.32900, further growth of USD/CAD quotes is expected. The movement is tending to 1.33100-1.33300.
An alternative could be a decrease in the USD/CAD currency pair to 1.32300-1.32000.
The USD/JPY currency pair
Technical indicators of the currency pair:
Prev Open: 112.091
Open: 111.342
% chg. over the last day: -0.48
Day’s range: 111.317 – 111.682
52 wk range: 104.45 – 113.53
USD/JPY quotes have become stable after a sharp increase last week. Currently, the trading instrument is consolidating. There is no defined trend. The key support and resistance levels are 111.200 and 111.750, respectively. In the near future, a technical correction of the USD/JPY currency pair is not excluded. We recommend paying attention to the dynamics of the US government bonds yield. Positions should be opened from key levels.
Japan’s financial markets are closed due to the holiday.
Indicators do not give accurate signals: the price has fixed between 50 MA and 100 MA.
The MACD histogram is in the negative zone, which indicates the development of the correction movement.
Stochastic Oscillator is in the neutral zone, the %K line is above the %D line, which gives a signal to buy USD/JPY.
Trading recommendations
Support levels: 111.200, 110.750
Resistance levels: 111.750, 112.250, 112.500
If the price fixes below 111.200, USD/JPY quotes are expected to correct. Movement is tending to 110.800-110.500.
An alternative could be the growth of the USD/JPY currency pair to 112.200-112.500.
By TheTechnicalTraders – Gold has rallied extensively from the lows near $1560 over the past 2 weeks. At first, this rally didn’t catch too much attention with traders, but now the rally has reached new highs above $1613 and may attempt a move above $1750 as metals continue to reflect the fear in the global markets.
We’ve been warning our friends and followers of the real potential in precious metals for many months – actually since early 2018. Our predictive modeling system suggests Gold will rally above $1650 very quickly, then possibly stall a bit before continuing higher to target the $1750 range.
The one thing all skilled traders must consider is the longer-term fear that is building in the markets. Many traders are concerned about the global economy with the Coronavirus spreading economic worries throughout Asia, Japan, and Europe. We believe this fear will push precious metals continually higher over the next 24+ months with a real upside target above $2100 eventually.
Right now, skilled traders need to understand that wave after wave of higher price rotation will continue to happen in Gold and Silver. If you missed the $1450 level and missed the $1550 level, this is your time to attempt to find your entry point near $1650 or below that level. Ultimately, real fear has yet to result in a parabolic rally in Gold and Silver – but it is likely going to happen within the next 24+ months.
As skilled traders, our Fibonacci price modeling system is suggesting that any price rotation below $1550 would be an excellent buying opportunity. These levels really depend on where the current rally ends and what happens in the global markets over the next 60+ days.
Less than 7 days ago, we published this research article suggesting that our ADL predictive modeling system was telling us that Gold would rally above $1650 within 15 to 30 days. It is very likely this rally will start a multiple-leg upside price advance in precious metals where Silver will finally breach the $20 to $21 level as Gold advances higher.
Once fear really enters the markets, we’ll see huge sector rotation and a massive price reversion event take place. Historically, Gold and Silver will react to this move, but the parabolic price move in precious metals will come 4 to 6+ months after the reversion event in the global markets. So, from a historical standpoint, any entry-level near current price levels is exceptional.
Trust us, you really don’t want to miss this next move in precious metals. Our Fibonacci price modeling system and Adaptive Dynamic Learning modeling system are suggesting price levels above $2400 as an ultimate upside price target for Gold.
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After updating the low at 1.0777 and returning to 1.0814, EURUSD has broken 1.0797 once again; right now, it is consolidating below this level. Possibly, today the pair may test 1.0797 from below and then start a new growth to reach 1.0769. After that, the instrument may resume trading upwards to return to 1.0797.
GBPUSD, “Great Britain Pound vs US Dollar”
GBPUSD has reached 1.2848; right now, it is trading to break the descending channel to the upside. Possibly, the pair may correct towards 1.2925 and then start a new decline with the target at 1.2825.
USDCHF, “US Dollar vs Swiss Franc”
USDCHF is still consolidating around 0.9834. The main scenario implies that the pair may fall towards 0.9830 and then grow to reach 0.9851. If later the price breaks this range to the downside, the instrument may correct towards 0.9800; if to the upside – form one more ascending structure with the target at 0.9860.
USDJPY, “US Dollar vs Japanese Yen”
USDJPY is moving upwards. Possibly, the pair may grow to reach 112.44. Later, the market may start another decline with the target at 111.11.
AUDUSD, “Australian Dollar vs US Dollar”
AUDUSD has completed the descending wave at 0.6600; right now. it is consolidating near the lows. Today, the pair may grow to break 0.6626 and then continue the correction towards 0.6684.
USDRUB, “US Dollar vs Russian Ruble”
USDRUB is moving upwards to reach 64.50. After that, the instrument may resume trading inside the downtrend with the first target at 63.68.
USDCAD, “US Dollar vs Canadian Dollar”
USDCAD is consolidating inside Triangle. Possibly, today the pair may grow towards 1.3286 and then form a new descending structure to reach 1.3203. Later, the market may resume trading upwards with the target at 1.3245.
XAUUSD, “Gold vs US Dollar”
Gold is moving upwards; it has already broken 1625.98. Possibly, the pair may fall to reach 1613.45 and then form one more ascending structure with the target at 1633.58.
BRENT
Brent has completed the ascending structure at 59.99; right now. it is correcting towards 58.50. After that, the instrument may resume trading inside the uptrend with the target at 60.60.
BTCUSD, “Bitcoin vs US Dollar”
BTCUSD is consolidating around 9588.00. Possibly, today the pair may correct to reach 9790.00 and then start a new decline to break 9315.00. Later, the market may continue trading downwards with the short-term target at 8900.00.
Attention! Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.
As we can see in the H4 chart, the divergence made BTCUSD stop rising at 50.0% fibo and start a new decline towards the support, which is close to 38.2% fibo at 9263.40. After completing the correction, the instrument may start a new rising impulse towards 61.8% and 76.0% fibo at 11010.00 and 12074.00 respectively.
The H1 chart shows more detailed structure of the current decline after the divergence. The pair has already corrected to the downside by 50.0%. The next targets are 61.8% and 76.0% fibo at 9090.00 and 8765.00 respectively. The resistance is the high at 10505.60.
ETHUSD, “Ethereum vs. US Dollar”
As we can see in the daily chart, after reaching 61.8% fibo, ETHUSD is forming a triangle correction. After completing it, the instrument may grow towards 76.0% fibo at 304.00. The support is 38.2% fibo at 210.34.
The H1 chart shows that the first descending impulse after the divergence has reached 38.2% fibo. If the pair breaks the downside border of a Triangle pattern, the instrument may fall towards 50.0% and 61.8% fibo at 222.22 and 206.61 respectively. The resistance is the high at 288.98.
Attention! Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.
The US dollar continued to strengthen against a basket of major currencies. The dollar index (#DX) closed yesterday in a positive zone (+0.18%). Optimistic data from the US were published yesterday. So, Philadelphia Fed manufacturing index counted to 36.7 in February and turned out to be better than the forecasted value of 12.0, which indicates an improvement in the manufacturing sector.
The Japanese yen fell to lows in two and a half years due to the continued spread of the coronavirus epidemic, which caused capital outflow from Asia, while having increased demand for such safe assets as the US dollar, gold and government bonds. On Friday, China reported accelerated growth in the number of coronavirus infected. South Korea reported 52 new infections. In Japan, new deaths were recorded. This weekend, G20 Finance Ministers and Central Bank Governors will discuss the epidemic risks for the global economy at a meeting in Saudi Arabia.
The “black gold” prices have been declining amid the spread of coronavirus. At the moment, futures for the WTI crude oil are testing the $53.00 mark per barrel. At 20:00 (GMT+2:00), Baker Hughes rig count will be published.
Market indicators
Yesterday, there was the bearish sentiment in the US stock market: #SPY (-0.41%), #DIA (-0.45%), #QQQ (-0.93%).
The 10-year US government bonds yield is consolidating. At the moment, the indicator is at the level of 1.48-1.49%.
The Economic News Feed for 21.02.2020:
– German manufacturing PMI at 10:30 (GMT+2:00);
– UK manufacturing PMI at 11:30 (GMT+2:00);
– Consumer price index in the Eurozone at 12:00 (GMT+2:00);
– Statistics on retail sales in Canada at 15:30 (GMT+2:00);
– Existing home sales in the US at 17:00 (GMT+2:00).
The EUR/USD currency pair keeps consolidating. There is no defined trend. The trading instrument is testing local support and resistance levels at 1.07850 and 1.08250, respectively. The USA continues to publish positive economic releases. Demand for USD remains at a high level. Nevertheless, in the nearest future we do not exclude technical correction of EUR/USD quotes after a significant drop. We recommend opening positions from key levels.
The Economic News Feed for 21.02.2020:
– EU Inflation Report (EU) – 12:00 (GMT+2:00);
– Secondary House Market Sales (US) – 17:00 (GMT+2:00);
Indicators do not give accurate signals: the price is consolidating near 50 MA and 100 MA.
The MACD histogram is in the negative zone, but above the signal line, which gives a weak sell signal for EUR/USD.
The Stochastic Oscillator is located in the neutral zone, the %K line crossed the %D line. There are no signals at the moment.
Trading recommendations
Support levels: 1.07850, 1.07500
Resistance levels: 1.08250, 1.08650, 1.09000
If the price fixes below 1.07850, exoect a decline toward 1.07500-1.07300.
Alternatively, the quotes could grow toward 1.08500-1.08700.
The GBP/USD currency pair
Technical indicators of the currency pair:
Prev Open: 1.29158
Open: 1.28796
% chg. over the last day: -0.31
Day’s range: 1.28758 – 1.28991
52 wk range: 1.1959 – 1.3516
The GBP/USD currency pair has retreated from the local lows. At the moment the technical picture is ambiguous. Sterling is testing the round level at 1.29000. The mark 1.28500 is a key support. The trading instrument has a potential for recovery. Financial markets participants are waiting for important economic reports from UK and USA. Positions should be opened from key levels.
At 11:30 (GMT+2:00) the UK will publish a number of indicators on business activity.
The indicators signal the sellers’ strength: the price has fixed below 50 MA and 100 MA.
The MACD histogram is in the negative zone, but above the signal line, which gives a weak signal to sell GBP/USD.
The Stochastic Oscillator is located in the overbought zone, the %K line has crossed the %D line. There are no signals at the moment.
Trading recommendations
Support levels: 1.28500, 1.28000
Resistance levels: 1.29000, 1.29450, 1.29750
If the price fixes above the round level of 1.29000, expect the quotes to grow toward 1.29400-1.29600.
Alternatively, the quotes could descend toward 1.28300-1.28000.
The USD/CAD currency pair
Technical indicators of the currency pair:
Prev Open: 1.32283
Open: 1.32587
% chg. over the last day: +0.31
Day’s range: 1.32447 – 1.32672
52 wk range: 1.2949 – 1.3566
There is an uncertain technical pattern on the USD/CAD currency pair. The trading instrument is moving sideways. At the moment local support and resistance levels are at 1.32400 and 1.32700, respectively. USD/CAD quotes have a potential to move down. Investors are waiting for important economic releases from Canada. We also recommend paying attention to the dynamics of oil quotes. Positions should be opened from key levels.
At 15:30 (GMT+2:00) the data on retail sales in Canada will be published.
Indicators do not give an accurate signal: 50 MA crossed 100 MA.
The MACD histogram is in the positive zone, but below the signal line, which gives a weak signal to buy USD/CAD.
The Stochastic Oscillator is located near the oversold area, the %K line has crossed the %D line. There are no signals at the moment.
Trading recommendations
Support levels: 1.32400, 1.32150, 1.31800
Resistance levels: 1.32700, 1.33000, 1.33250
If the price fixes below 1.32400, expect the quotes to fall toward 1.32000.
Alternatively, the quotes could grow toward 1.32900-1.33100.
The USD/JPY currency pair
Technical indicators of the currency pair:
Prev Open: 111.337
Open: 112.091
% chg. over the last day: +0.55
Day’s range: 111.871 – 112.185
52 wk range: 104.45 – 113.53
USD/JPY quotes show a stable upward trend. The trading instrument has updated the local highs. At the moment the yen has stabilized. Local support and resistance levels are at 111.750 and 112.250, respectively. Technical correction of USD/JPY currency pair is not ruled out in the nearest future. We expect important statistical data on the US economy. We also recommend to keep an eye on the current information about the epidemic in China. Positions should be opened from key levels.
The Economic News Feed for 21.02.2020 is calm.
The indicators signal the strength of buyers: the price has fixed above 50 MA and 100 MA.
The MACD histogram is in the positive zone, but below the signal line, which gives a weak signal to buy USD/JPY.
The Stochastic Oscillator is in the neutral zone, the %K line is below the %D line, which indicates the development of a correction movement.
Trading recommendations
Support levels: 111.750, 111.200, 110.750
Resistance levels: 112.250, 112.500
If the price fixes above 112.250, expect the quotes to rise toward 112.500-112.800.
Alternatively, the quotes could correct toward 111.300-111.000.
It seems as if the USD/JPY took its time to react to Japan’s latest economic developments last Monday.
The data showed that Japan’s GDP shrank an annualized 6.3% in Q4 of 2019, following a downwardly revised 0.5% growth from the previous period, performing much worse than the pessimistic market forecasts of a 3.7% fall.
It was the sharpest contraction since the second quarter of 2014, and second-biggest drop since the Great Financial Crisis. This was led by falls in consumer and business spending on the back of a sales tax hike, a destructive typhoon, and subdued global demand. And yet, this does not include the potential negative effects of a shrinking global economy driven by developments around the Coronavirus, so the JPY was sold off sharply, pushing the USD/JPY to new yearly highs and the highest levels since May 2019.
If today’s economic data around several US PMI’s come in better than expected and result, at least in the short-term, in a push higher in 10-year US-yields, the push above 111.00 over from the last few days would certainly become sustainable. It would bring 112.00/30 into our focus for the weekly close, make further gains in the currency pair up to 114.00/30 in the coming days a possibility.
Technically the mode on a daily time-frame can now be considered bullish, as long as we trade above 107.80/108.00:
Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between December 11, 2018, to February 20, 2020). Accessed: February 20, 2020, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2015, the value of the USD/JPY increased by 0.5%, in 2016 it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, in 2019, it fell by 0.85%, meaning that after five years, it was down by 9.2%.
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By TheTechnicalTraders – As we continue to get more and more information related to the Coronavirus spreading across Asia and Europe, the one thing we really must consider is the longer-term possibility that major global economies may contract in some manner as the Chinese economy is currently doing. The news suggests over 700+ million people in China are quarantined. This is a staggering number of people – nearly double the total population of the entire United States.
If the numbers presented by the Chinese are accurate, the Coronavirus has a very high infection rate, yet a moderately small mortality rate (2~3%). Still, if this virus continues to spread throughout the world and infects more and more people, there is a very real potential that 20 to 50 million people may be killed because of this event. It may become one of the biggest Black Swan events in recent history.
We really won’t know the total scope of the damage to the Chinese and Asian economies for another 35+ days – possibly longer. The information we have been able to pull from available news sources and from the Chinese press is that hundreds of millions are quarantined, the Chinese Central Bank is pouring capital into their markets in order to support their frail economy and, just recently, President Xi suggested stimulus will not be enough – austerity measure will have to be put into place to protect China from creating a massive debt-trap because of this virus.
Austerity is a process of central bank planners cutting expenses, cutting expansion plans, cutting everything that is not necessary and planning for longer-term economic contraction. It means the Chinese are preparing for a long battle and are attempting to protect their wealth and future from an extreme collapse event.
From an investor standpoint, FANG stocks have outperformed the S&P, NASDAQ and DOW JONES indexes by many multiples over the past 5~6 years. The chart below highlights the rally in the markets that originated in late 2016 (think 2016 US Presidential Election) and the fact that foreign capital poured into the US stock market chasing expected returns promised by future President Trump.
It becomes very clear that the FANG stocks rallied very quickly after the elections were completed and continued to pull away from valuation levels of the S&P, NASDAQ and DOW JONES US indexes. How far has the FANG index rallied above the other US major indexes? At some points, the FANG index was 30~40% higher than the biggest, most mature industries within the US. In late 2018, everything contracted a bit – including the FANG index.
As or right now, the FANG index has risen nearly 274% from October 2014. The S&P has risen nearly 60% over that same time. The NASDAQ has risen 140% and the S&P 500 Info Tech Index rose 180%. The reality is that capital has poured into the technology sector, FANG stocks and various other US stock market indexes chasing this incredible rally event.
This Netflix Weekly chart highlights what we believe are some of the early signs of weakness in the FANG sector. The sideways FLAG formation suggests NFLX has reached a peak in early 2018 and investors have shied away from pouring more capital into this symbol while the Technology index and FANG index have continued to rally over the past 8+ months.
This Weekly Custom FANG Index chart highlights the rally that took place after October 2018 and continues to drive new highs today. This move on our Custom FANG index shows a very clear breakout rally taking place which is why we believe more foreign capital poured into the US markets as the US/China trade deal continued to plague the global markets and as BREXIT and other economic issues started to weigh on economic outputs. What did investors do to avoid these risks? Pour their capital into the hot US technology sector.
Another chart we like to review is our Custom Technology Index Weekly chart. This chart shows a similar pattern to the FANG chart above, yet it presents a very clear picture of the excessive price rally and rotation that has taken place over the past 5+ months. The real risk with this trend is that investors may start to believe “it will go on forever” and “there is no risk in these trades”. There is a very high degree of risk in these trades. Once the bubble bursts, the downside move may become very violent and shocking.
A reversion event, bubble burst event, in the technology sector as a result of the economic collapse in China and throughout other areas of the world may break this rally in the technology sector at some point and may push investors to re-evaluate their trading plans. Until investors understand the risks setting up because of the Coronavirus and the potential for a 20%, 30%, even 40% decrease in economic activity and consumer spending may finally push global investors to really think about the true valuations within the FANG/Technology sector.
We writing this article to alert you to the very real fact that “what goes up – must come down” at some point. Pay attention to how this plays out and what may cause global investors to suddenly change their opinion of the Technology sector. A pullback in this sector may result in a -40% to -50% price reversion.
We believe the economic collapse and humanitarian crisis that is unfolding in China may be enough to put a massive dent in future expectations for 2020 and 2021. You simply can’t have a major global economic collapse in this manner without having some type of cross-over event. As we learned in 2008-09 with the US credit crisis – when a major economy collapses its assets and financial markets, the ripples spread across the globe. China may become the next financial crisis event for the new decade.
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