Markets are lower in afternoon trading in New York today. China fears have created uncertainty, and why we looked to short the Transports yesterday.
It seems like rough markets have a way of originating in China.
Thinking back to 2007, I remember watching the China markets meltdown. This process began well ahead of the US financial crisis of 2008.
Looking back at markets that you have lived and traded through, you amass a mental library of history and look to learn from it. Before 2007, I spent years as a Real Estate Agent and remember the days of people being approved for home purchases on variable ARMs and very low-income requirements. You just knew the music would have to stop at some point as banks loaded up subprime borrowers with debt that logic would dictate as unpayable.
The China markets started to crack ahead of the US markets back then.
Figure 1 - Shanghai Stock Exchange Composite Index March 24, 2007 - May 2, 2008, Daily Candles Source stockcharts.com
I do remember watching this market at the time. Other China indices fared even worse. Around this time, the $SPX experienced a pullback too, but one of a much lesser magnitude.
Figure 2 - S&P 500 Index August 1, 2007 - December 7, 2007 Daily Candles Source stockcharts.com
As we can see, the $SPX also pulled back around this time, but in more of a pedestrian manner, with a 5.4% pullback over an 11 day period versus 10.8% for China around the same time period.
It is important to note that the $SPX had pulled back prior to this time and rebounded to all-time highs. I am mentioning all of this as markets have memories and accelerated moves in China catch my attention. Let’s also mention the obvious here: the Covid meltdown in Feb - March 2020.
As China is grabbing all of the headlines today, let’s see how the Shanghai Stock Exchange Composite has fared yesterday and today.
Figure 3 - Shanghai Stock Exchange Composite Index March 17, 2021 - July 27, 2021, Daily Candles Source stockcharts.com
Yes, the Shanghai Composite is lower over the last two days. However, the sky isn’t falling, at least not yet. It is lower by 2.9% or so over the past two sessions. Note the support that was found around its 200-day moving average.
What All of This Means for Us
I believe it is smart to avoid getting too caught up in the daily headlines, for the most part. Price and divergences can tell better stories than any news headlines, which often come out much too late.
This is the reason that it made sense to target the Transports to the downside yesterday. We had a pattern of lower highs and lower lows, with clear divergence from the direction of the broader markets since May 1st. In case you missed it, you can read about the analysis of the Transports in the July 23rd publication and in yesterday’s July 26th publication.
As we targeted the short side of the IYT yesterday afternoon around $258.00, let’s see how the transports are faring in today’s market down day.
Figure 4 - iShares Transportation Average ETF March 1, 2021 - July 27, 2021, Daily Candles Source stockcharts.com
The IYT is lower by 2.54% as of the time of this writing. As discussed, the Transports were already trading lower versus the broader indices.
Right now, we see the RSI(14) at 40 and daily MACD crossover brewing to the downside with the fast line crossing the slow line.
We will hear from the Fed tomorrow.
The FOMC statement and subsequent press conference is slated for tomorrow. Those kinds of days can be tough to trade, and depending on the Fed’s tone, anything could happen.
All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' employees and associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
Recommended Content
Editors’ Picks
AUD/USD holds above 0.6500 in thin trading
The Australian Dollar managed to recover ground against its American rival after AUD/USD fell to 0.6484. The upbeat tone of Wall Street underpinned the Aussie despite broad US Dollar strength and tepid Australian data.
EUR/USD comfortable below 1.0800 lower lows at sight
The EUR/USD pair lost ground on Thursday and settled near a fresh March low of 1.0774. Strong US data and hawkish Fed speakers comments lead the way ahead of the release of the US PCE Price Index on Friday.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays near 4.2% after upbeat US data and makes it difficult for XAU/USD to gather further bullish momentum.
Google starts indexing Bitcoin addresses
Bitcoin address data is live on Google search results after users realized on Thursday that the tech giant started indexing Bitcoin blockchain data. However, mixed reactions have followed the tech giant's reversed stance on the cryptocurrency.
A Hollywood ending for fourth quarter GDP
The latest revisions put Q4 GDP at 3.4%, the second fastest quarterly growth rate in two years. Much of the upside was attributable to stronger consumer spending, yet fresh profits data affirmed it was a good quarter for the bottom line as well with profits up by the most since the Q2-2022.