25 August 2023
This US market correction started around the 1st of August and has been going on for over 3 weeks. In between, it has rallied when some major stocks reported better-than-expected earnings.
For example, the DOW jumped over 1% on 6 August when Berkshire Hathaway Inc. posted record earning results, beating the estimates. Again on 23 August, the Nasdaq jumped over 1% when NVIDIA posted its record-breaking earnings and the DOW went up by about 0.5%.
Unfortunately, the rally lost its steam the next day after DOW and other US bourses shed their gain. Nasdaq lost about 2% and S&P and DOW over 1%, wiping out their gains for the week.
All-in-all, DOW has lost a total of about 4.5% from its peak around 1st August.
Where DOW would be heading?
In the last article on 5 August 2023, we spotted that DOW has 3 candlestick gaps to cover. There is also a supporting Trendline T1. If this Trendline T1 is broken, DOW will want to go lower. On its way down, those candlestick gaps will be covered if the supports S2 @ 33,718 or thereabout failed to hold the price slides.
Let's look at the picture of DOW today
Click picture to enlarge
In this new chart, we are introducing 4 technical indicators to chart our direction. These area) The Bollinger Band indicator;
b) The 20-day, 50-day, 100-day and 200-day moving average indicators;
c) The MACD momentum indicator, and
d) The Chaikin Money Flow indicator
From the chart, we saw readily that
a) DOW's Candlestick G1 was covered on Tuesday;
b) DOW has broken the 20-day and 50-day moving average and now resting at the 100-day moving average;
c) The Bollinger band is still expanding, and
d) There were no signs that the MACD had begun to pick and the money was flowing into the market.
With such conditions prevailing, we are expecting that
a) DOW will continue to slide and test Trendline T1 today or next week;
b) The bulls will put up a fight, trying to recover lost ground and preventing DOW from testing the Trendline T1.
c) DOW to test the support S2 @ 33,716 If T1 cannot hold the sliding;
d) Dow will proceed to cover up the candlestick gap G3 if S2 cannot hold the price slide.
By then, DOW would have shed by about 8% from its peak on 1st August 2023.
5 August 2023
The US market has had a
good time for the past 10 months since October 2022 when DOW hit the bottom @
28,700. Since then, the US market has rallied up 18%. Today,
it is at around 35,000 which is just a few stone's throw away from the all-time high of 36,990 in 2022.
Now many traders noted
that the US market has started to soften, significantly after Fitch downgraded the
US Credit rating from AAA to AA+ on Tue 01
Aug 2023. They were
wondering if this was the end of the rally or if it was just another correction.
US Credit Rating Downgrade- A
Non-Event
On
24 May 2023, Fitch placed the United States 'AAA' Rating (IDR) on
Rating Watch Negative. This was mainly
because the US Treasury said it would run out of money by 1 June 2023. At
that time, Fitch already had a ‘AAA” rating on the U.S. country ceiling. It said that the US rating would still remain
at 'AAA' even when there was a debt default. However, Fitch had some negative comments about the high and rising US
Debt burden.
On the other hand, Analysts at Singapore’s DBS were dead sure that Fitch’s downgrade on the US’s rating was a non-event for the equity market. They wereprettye sure that
the equity market, going ahead, would be
driven by the Corporate earnings, and the prevailing macro conditions.
Wasn’t there a Downgrade in 2011 sending
Stocks Tumbling 7%?
There was a similar
downgrade in August 2011. That time, it was S&P who degraded the US's credit rating. That downgrade caused the S&P500 to lose 7% on a Monday, 8
August 2011, which was popularly known to be the “Black
Monday” in the history of the stock market. Then there was a debt ceiling crisis during the
era of President
Barack Obama. However, the US Government official pointed out that S&P had made an error of USD 2
Trillion error in its calculation. As a result, many Analysts were of the view that this
S&P downgrade was more or less politically motivated.
Why This Time is Different?
Anyway, the situation is very different today. We can see from the following 2 Fred charts that:
a) The market liquidity is much better off today as compared to those days in 2011. Then the US was just started to introduce QE. They were careful doing it and the liquiditiy run out soon after;
b) The present National Financial Condition has improved and started to ease after the market recovered in October 2022. Unlike those days in 2011, the financial condition then was rising at a very fast rate, just like those days before the 2008 market crash.
Also, many traders in 2011
didn’t quite understand the power of Quantitative Easing (QE). They tended to panic quickly, especially
when they had had a wrong time just two years ago.
The recent Fitch downgrade of the
US rating to "AAA" was already speculated in May 2023. Fitch was just confirming it on 1 August. Also, the damages done by the 2011 downgrade were recovered within a week.
Given the
above, we tend to agree with the
Analysts in DBS that this Fitch downgrade on the US credit rating is not likely to have a serious impact on
the equity market.
Technical Analysis
On the technical front, we are seeing DOW
testing the support S1 at 35,100 in the weekly chart. If this support S1 is
bleached, DOW would want to test the
support at trendline T1. The other
support S2 and S3 are shown in the following chart.
Here is another picture
of the technical chart in a daily plot.
Candlestick Gaps
We found 3 candlestick
gaps when DOW was making its way up the “ladder”. These are namely, G1, G2, and G3 respectively in the following chart.
We expect these gaps
would be filled when DOW were to break below trendline T1. They are just ordinary gaps. This is provided the key support S2 cannot hold the price slides.
When will the market recover?
We can’t read directly from the
DOW’s chart when will the market recover from the present falls but we found both the S&P500 and Nasdaq had already broken their Trendline T1 as shown in the following chart. This was about a week ago.
From the S&P chart, we are expecting the price to test the
support S1 @ 4,340 which is just a stone's throw away. It would be the time when DOW is about to test its trendline T1. We would expect DOW to fill up gaps G1 and might be G2 on its way down.
