China marks the way for markets down

Once again, decline prevails on the stock markets. US indices closed lower for the fifth trading session out of the last six. Chinese statistics added to the anxiety in the markets on Wednesday morning, failing to meet the forecasts.

Most worrisome was a 2.5% y/y rise in retail sales compared to 8.5% a month earlier and the expected 7.0%. Industrial production is also losing steam, adding 5.3% y/y vs 6.4% a month earlier and 5.8% expected. Local lockdowns and high commodity prices hold back growth in the second-biggest economy much stronger than expected, returning pessimism to the markets.

Technically, the pressure on US equity markets echoes what we have seen every month since April: indices are slumping ahead of the monthly or quarterly expiration of futures and options on the third Thursday of the month, slang termed "witching day". In most cases, the S&P500 has pulled back to its 50-day moving average by the expiration date, finding buyers immediately afterwards.

The big question is whether this tactic will work this time. It is not uncommon for markets to experience significant long-term trend reversals near expiration dates. Therefore, cautious traders should wait for the "witching day" pattern to end. A consolidation below the 50-day moving average might initiate a deeper correction, by 5-10%, one we have not seen since last October.

The reversal confirms the technical picture on the bears' side to the downside in the Chinese stock indices. In the Hang Seng, H-star and A50, the selling pressure has intensified on the downward approach of the 50-day moving average, indicating a continued bearish trend. In 2020 the selling pressure started precisely from the Chinese markets. America and Europe only ignored this reversal for a few weeks and then reversed downwards at an unprecedented speed in history.

Negative market dynamics and signs of a loss of momentum in the economy could affect the Fed's plans to roll back stimulus. The next FOMC meeting is a week away, kicking off a "period of silence" when Fed officials are not commenting. It promises to be a very nervous week for the markets.