‘Diamond Hands’ Traders Get Ready to Buy

Pressure on equities continues. Hourly price charts have been printing lower lows and lower highs since the start of September and, at first glance, appear stuck in that downward channel. Monday morning’s news that Hopson Development might bail out beleaguered Chinese conglomerate Evergrande hasn’t calmed many nerves.

Source: IG

Just as the Evergrande pressure point has been eased, another has appeared. US officials are starting to raise the possibility of tariffs on Chinese goods due to breaches of the trade agreement between the two countries. Threats of restrictions on international trade will be delivered with some sense of irony given the global logistics crisis. Parts of the world’s supply chain are already breaking down even without help from point-scoring politicians. And oil price hikes can’t be ruled out due to the convening of the latest OPEC summit, which starts on Monday.

Factor in a worldwide tightening of monetary policy, and the question to be asked is whether the 6^th of September 2021 marks the end of a 10-year bull run?

Source: IG

Equity Index Moving Averages

The S&P500’s Daily moving averages have formed a pattern that can only be described as bearish.

Last Monday’s downward intersection of the 50 SMA by the 20 SMA formed a textbook sell signal which would have been profitable for anyone looking to short equities on the back of the wide-spread uncertainty. The next point of interest is the almost inevitable breach of the 100 SMA, which could happen this week.

Source: IG

On a weekly chart, price has broken to print below the 20 SMA, with that metric now providing stiff resistance in the region of 4369.

Source: IG

Top of the Market or a Dip to Buy?

The picture of economic fundamentals is unclear, a situation not helped by so many factors being in play. An argument can be made that they reflect the fallout from past events, largely the Covid pandemic. With many and varied parts of the global economic system readjusting to that shocking event, there is a temptation to consider the current situation as part of a process of reorganisation. Adopting that conclusion moves them some way from being leading indicators of the next price move. It also points to the recent downward price move being a timely and technical analysis-based check on stock valuations that moved to the top end of the scale through the summer months.

The multi-year equity bull run, which started in the 1990s, survived the Dot-com Crash, the 2008 Financial Crisis, a US-China tariff battle, and Covid. For the bulls, it’s easy to consider Evergrande as a minor inconvenience in comparison. Will Beijing allow a firm that is too big to fail to go under? Or as looks more likely, will it manufacture a solution to the crisis and a tightening up of future policy. Each of the different situations does stack up, but none look insurmountable. The time to buy could be approaching, even if it doesn’t appear to be immediately visible.

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About the author: Justin Freeman

Justin is an active trader with more than 20-years’ industry experience of working for big banks and hedge funds. He has an inside knowledge of how the financial markets work, thanks to roles including trader on a $750m Event-Arbitrage desk and CRO and COO of hedge funds running a variety of strategies. From stat-arb and trend-following CTA to fixed-income relative value. Firm’s he has worked at include big banks like Citi, and prominent hedge funds including D. E. Shaw and Millennium Capital Management.

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