May 17, 2019 – Trade news drove the market for most of the week this week, and for most of the week the news was not good.
Monday was the week’s ugliest day. It was the ugliest day stocks have had for a while. While last week ended with the sense that trade talks had taken a large step back, this week started with the impression that talks with China were off the rails entirely. After more rhetoric via tweet from the president over the weekend, China announced a set of tariffs meant to be retaliation for the increase in import duties imposed by the U.S. on Friday.
There were a series of vague noises made about a resumption of talks this week, but for some reason, the market, which spend Tuesday through about midday Friday climbing out of the hole it dug on Monday, make a fresh leg down late in Friday’s session on a headline that trade talks have stalled.
It remains possible that President Trump and Chinese Premier Xi could talk at the G-20 summit in late June, but a sidebar conversation at the G-20 isn’t going to resolve the dispute. It could pave the way for talks to resume, but that would require some concessions by one or both sides.
The good news, such as it is, on the trade front is that President Trump decided not to impose tariffs on automobiles and auto parts. This isn’t a permanent decision, just a delay for “up to six months”. The market reacted favorably to that announcement, but the official announcement of the delay called for a reduction of imports, which suggests that the administration believes tariffs are necessary.
The U.S. did reach an agreement to lift tariffs on steel and aluminium imported from Mexico and Canada, which had been a sticking point in getting those countries to pass the re-negotiated NAFTA, or USMCA. Congress still needs to pass the measure as well, but politicians on both sides of the aisle have some issues with the agreement and a vote hasn’t been scheduled.
We’re not sure exactly what next week holds but the recent pattern and Friday afternoon’s action on a headline that didn’t seem like new information suggests traders may be starting to worry about what can develop over the weekend and are taking precautions. This could lead to a jump Monday morning if things are looking good after the weekend.
All told this week, the S&P lost 0.76%, the Nadsaq fell 1.27%, and the Dow Jones lost 0.69%.
After opening the week below its 50-day moving average (green line), the S&P 500 continued to sell off heavily on Monday and tested its strongest level of technical support (dotted lines) at 2,800. The S&P was able to recover but ran out of steam when encountering resistance (solid lines) at 2,880. It was nice to see the index power through the convergence of its 8 and 50-day moving averages, but after pulling back Friday, this places the S&P back below the 50-day. It will take serious strength to get back above its 50-day and through the 2,880 level of resistance. Should the index pull back further, the S&P has decent support between 2,800 and 2,840. The index has even stronger support at 2,780 with the help of the 200-day moving average if the 2,800 level of support cannot hold.
The Nasdaq ended the week with support holding at 7,800, but this also places the index back below its 50-day moving average. Like the S&P, it will take some strength to rise back above its 50-day and power through resistance around 7,950. The Nasdaq has a fair amount of support if it falls from this level, but the strongest levels of support are around 7,500-7,600.
Dow Jones Industrial Average
The Dow Jones was able to find support in its 100 and 200-day moving averages and was able to close the week staying above its 8-day moving average. This places the Dow just below technical resistance at 25,800 and various other forms of resistance. If the Dow pulls back, the 25,400 level will be key. If the index falls below this level of technical support with the convergence of its 100 and 200-day moving averages, it may be hard for the index to recover. While stronger levels of support are at 25,000 and below, we would really like to see the Dow stay above its 200-day moving average.
The Russell 2000 has found itself back in an unfavorable position. With the significant drop Monday, this places the Russell back below nearly all of it main moving averages, with the majority converging between technical resistance between 1,550 and 1,580. Rising back above these levels will take serious strength. The Russell has strong support in its 100-day moving average (yellow line) with technical support at 1,520. It also has strong support at 1,450, but there is much more resistance than support at these levels. We will need to start looking at a 2-year chart to find support if the index pulls back any further.