As said last week, we are extremely close to the point where our bullish scenario is invalidated, as 4 out of 5 risk indicators have turned bearish. We wrote our article right before the sell off stopped.
These are very rough markets, and investors should be careful with positions. Overreacting is not a good idea, so being very effective with a minimal number of trades is important.
Where do we stand, and where do we go from here? Let’s revisit four major indexes in the world.
First, the S&P 500 in the U.S. The index touched its 2011 trendline this week. Things are really very simple at this point: if this support line does not hold, the index will probably fall in a matter of two weeks to the breakout level. We are very close to that point, which is what our risk indicators signaled last week, though the ultimate confirmation is a 3-day break below 1850.
Over in Europe, the German DAX has broken down in the last couple of days. It is now clearly eyeing its breakout point, which is around 8250 points, around some 10 percent below today’s levels. Likely that point will be hit early March, which is close to the March ECB announcement where Mr. Draghi is going to announce additional monetary stimulus.
In Japan, the Nikkei 225 index looks very scary. The index is at the point where it is breaking through secular support. This is HUGE news. Why? Because the trend channel in which it could fall has always acted as a ‘vacuum cleaner’, with very aggressive moves. If the Nikkei trades for a couple of days below 15700, it has a confirmed breakdown.
Last, the emerging markets ETF (EEM) has stalled right at secular support. It could go both ways now, and we prefer not to anticipate, but rather let the market do its work.
Stock indexes are really trading at MAJOR levels today, think of the S&P 500 / the Nikkei / EEM, while the German DAX is clearly on its way to test huge support in a couple of weeks.