The setup headed into last week was a pretty strong one; light on data & earnings news, which allowed markets to trade largely on the technicals and interest rates. The trend was very strong and in the ‘information vacuum’ that was last week, this provided a nice opportunity for stocks to continue their run higher, making numerous new highs and this is exactly what occurred. We saw several new highs made in each of the four major U.S. indexes throughout last week’s trading. In fact, the S&P 500 & Nasdaq indexes both rallied to new intra-day highs early in Friday’s trading before things quickly turned south. After the first few hours of trading, reports began to surface that the Trump Admin was seriously considering implementing massive additional tariffs on China as a result of recent events between the two nations regarding export controls over crucial resources. These rumors were confirmed shortly thereafter by several social media posts from the President and from the market’s perspective it felt a bit like a flashback to April of earlier this year. With this newly added tariff uncertainty, markets understandably reacted quite negatively as each of the major indexes sold off sharply in quick fashion. As news about the new tariffs being placed on China continued to break, it was finally reported that the new tariffs would be an additional 100% and this was of course much worse than the market would have anticipated. This development is what led stocks to continue to sink into the end of Friday’s trading and see the major indexes across the board finish at the lows of the day headed into the weekend. I never like to see indexes have a big Friday sell-off and end near session lows headed into the weekend as much selling pressure could potentially build over the weekend leading to a rough day of trading on Monday. The hope is that traders can take a breath over the weekend, and take a chance to assess the situation after they sold and asked questions later on Friday. Given that this week ahead is going to be filled with market catalysts, it would be wise for traders to expect some volatility in the Monday session.

            Following the late week rout in stock prices, we need to take a look at the technical picture to see what we can glean from the charts. Of course, Friday’s trading was ugly, you can’t make any bones about that. With that said, the long term trend is still firmly intact as the S&P 500 is trading well above its 200-day moving average. Now for the time being, the index remains above the 50-day moving average as well, but this could be an early level of support that is tested in the week ahead. The 50-day moving average is approximately 6530 and this also lines up well with a prior level of resistance for the market from August. In much of August’s trading, the market continued to bump its head around this level before finally powering through in September, which flipped this range to a level of support. It will be crucial to see this support level hold in the week ahead for the S&P or we could be in for a bit larger drawdown. Make sure to keep a close eye on this support level for stocks if it comes into play. With all of this said, the S&P 500 had not endured a 2.5% decline from its recent high since early August. Since then, the market has gained a lot of ground and it was due for a pullback, there just needed to be a catalyst to put this move into motion. It’s typical to get a 2.5% correction several times per year and given October’s history of being the most volatile month on average, it seems this pullback has arrived right on schedule. As volatility is beginning to pick up, it will be even more important for traders to be mindful of the technicals and keep a close eye on the charts in the weeks ahead. This market has run quite a bit on the technicals of late, so it will be massively important to see the technicals remains strong.

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Key Events to Watch For

  • Q3 Earnings Season Begins
  • U.S. Retail Sales/ PPI Inflations

This week ahead is going to be a major ‘prove-it’ type of week for this market and it will be filled with many catalysts. The most important one is likely to be the major earnings results that will be reported this week. Q3 earnings season will begin this week as the major U.S. financials will begin to report their quarterly numbers. The reporting will really ramp up on Tuesday morning as J.P. Morgan Chase & Co., Wells Fargo, Goldman Sachs, and others are set to report their results in the premarket. These major reports will continue through Wednesday and Thursday as well as they will feature a number of other significant reports. These new earnings reports are sure to serve as a major market catalyst helping to steer the direction of the next market move. Traders would be wise to expect outsized volatility in many of the stocks due to report earnings this week.

            Regarding the government shutdown, things are largely unchanged from where they stood when I wrote last week’s version of this newsletter. The shutdown is still in effect and there have been few signs of any progress. This week we are due to get a few additional significant data points, plus several that are quite delayed as well, namely the Job’s report. This week, on Thursday prior to the market open, we are supposed to get the updated U.S. retail sales & PPI inflation prints. Of course, whether we get these key data points on time all hinges on the status of the government shutdown. It is very possible that these reports are also delayed as it is anyone’s guess when this shutdown will get resolved. However, should we see some progress in Washington and see this shutdown end early in the week and we do get these reports on time, they could serve as additional market catalysts in the week ahead.

Thank you for reading this week’s edition of the Weekly Market Periscope Newsletter, I hope you enjoyed it. Please lookout out for the next edition of the newsletter as we will give you a preview of the upcoming week’s important market events.

Thanks,

Blane Markham

Author, Weekly Market Periscope

Hughes Optioneering Team