US equity markets are stress testing important technical support levels just above the summer lows heading into what I view is a binary trade-tariff backdrop. Short-term momentum indicators, tracking 2-4 week swings, are oversold and beginning to bottom as equity indices attempt to stabilize at support. That suggests a rebound is poised to take hold.

What I find particularly interesting is the behavior of markets outside of equities, notably bonds, gold and few risk-on currencies. For example, as equities flip-flopped through the past week US 10- and 30-year Treasury yields diverged climbing to new weekly highs as did the risk-on euro-yen currency pair. In addition, gold broke its relative uptrend to copper, something that had been in place since April.

I encourage readers to take a look at the daily chart of the TLT, which is the largest long bond ETF. It is early to conclude a major trend shift is developing but lower highs are in place, and the TLT (142.20) broke below its shorter-term uptrend defined by the 50dma (142.97) on Thursday.

While no one has an edge on how the trade talks will conclude, capital markets are at a technical inflection point that should support an upside reaction favoring growth and cyclical equities. In the Noteworthy section on the next page, I discuss the pending rotations potentially developing back toward technology along with cyclicals and away from defensive sectors.

This week’s chart reviews the IGV Software ETF as one of the catalysts likely to help fuel an acceleration in the technology sector. As usual, let’s break down the technical story and note the similarities between the current technical setup and what developed during the last cycle in Q4 2016.

Software Index IGV ETF – First signs of bottoming at its 200-day sma

Stress Testing Says Equity Rebound Poised to Take Hold

Software Index IGV ETF – First signs of bottoming at its 200-day sma In the top panel, the weekly momentum indicators are suitably oversold to be looking for a bottom and upturn to develop, which is happening as price, in the second panel, is beginning to bounce from widely watched support at 40-week (200-day) moving average.

In addition, relative performance versus the S&P 500 is in the early stages of turning up at a higher low from the cycle lows that developed in late 2018. Lastly, in the fourth panel, relative performance versus the S&P 500 tech sector is retesting the cycle lows and showing early signs of bottoming. Bear in mind, it’s early to conclude an upside reacceleration is already underway but this is where the IGV should bottom and it is showing early evidence of doing so. I’m looking for further upside through Q4 well into 2020.

Stress Testing Says Equity Rebound Poised to Take Hold
Stress Testing Says Equity Rebound Poised to Take Hold
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