Good to Know

Good to know.  Markets rose yesterday in anticipation of the US midterm elections being over in a low volume day.  Do you hear that?  It is a sigh of relief because now we know.  We know for certain what the pollsters have been predicting for many months.  The Democrats have regained control of the House of Representatives and the Republicans have retained their control over the Senate.  As I said yesterday and on so many others, the market doesn’t like surprises and thankfully yesterday’s results were not a surprise.  You will hear and read many sound bites and snippets about how the market typically does after midterm elections with split chambers but I suggest that you take those all with a grain of salt.  Markets will now get back to the business of focusing on the key issues at hand: interest rates, tariffs, corporate earnings, economic output, and inflation.  All of the pre-election rhetoric is behind us, and now investors can focus on their portfolios, and Congress and the President can deal with matters of the state (unless that caravan crossing Mexico is planning to somehow start trading stocks and bonds, in which case, investors should care).  Speaking on matters of the state, even a split Congress can do a lot to help the US economy.  Many expect the House to finally take up and pass the President’s infrastructure bill, which would create jobs and create stimulus across many sectors.  The President’s last minute from-the-hip additional tax cut probably won’t make it though.  Most Presidents wait until the final two years of their terms to push economic stimulus, usually in a bid to win re-election.  That is why markets typically do better after midterms.  Trump however did it in the reverse, choosing his economic agenda in the first half of the term with last year’s tax bill.

Let’s take a quick look at the charts in my attached daily chartbook.  The S&P500 crossed over its 2746 Fibonacci resistance line and is right below its 200 day moving average.  A close above the 200 day moving average will be positive for the index which will get support from from its 2746 Fib line and resistance from the 200 SMA and its 2792 Fibonacci line (chart 4).  The Dow Jones Industrial Average closed just below its high of the session and will get support at 25423 and resistance at 26095, both Fibonacci lines.  Maintaining its momentum, which turned positive within the past two sessions, will be critical for this index (see bottom panel of chart 6).  The small cap Russell 2000 had another positive day and continues its climb back up from its recent lows, reached only a few weeks back.  The index will get resistance from its 1567 Fibonacci line (chart 7).  The NASDAQ 100 closed off of its high of the session, right around its resistance point of 7000.  The index will get further resistance from its 200 day moving average and its 7100 Fibonacci line (chart 8).  Crude oil has continued to slide, and closed below a key support level at its 62.03 Fibonacci line, and flirted with bear market territory (chart 11).  Remember that bear territory is when a market closes greater than 10% below a recent high.  The reason for its ongoing free fall is increased supply.  Output from oil producing nations (including US shale) remains high, and the Iranian oil embargo, which kicked in this week, appears to be far less restrictive than anticipated with many countries getting vouchers to continue trade.  A continued slide in crude can start to have an effect on the overall markets.  You may have noticed that I cite Fibonacci numbers a lot lately which is largely due to the fact that the markets fell so precipitously in early October after spending much of the prior months trading just below their highs.  This left very little in the way of natural support and resistance points other than the Fibonacci levels.  I covered them briefly a while back, but I thought that I might re-introduce Fibonacci as I have been using them so much lately and, well, its is geek-out Wednesday.

Leonardo Fibonacci was an Italian mathematician from the Middle Ages and is principally known for his work entitled Liber Abaci.  Amongst the many revelations in his work, he introduced and solved a numerical sequence that occurred frequently in nature.  He used rabbit population growth to prove what would ultimately be known as the Fibonacci number sequence, although there is some proof that the sequence had been previously identified in India in the 6th century.  The sequence starts with 0, 1 and the next number is the sum of the prior two, so the the third number is: 0 + 1 = 1, the fourth is 1 + 1 = 2 , the fifth is 1 + 2 = 3, and so on.  We end up with something like 0, 1, 1, 2, 3, 5, 8, 13, 21, 34 … 237.  Once other mathematicians and naturalists got a hold of the sequence they started to realize that the sequence appeared all over nature and was not limited to just rabbit populations.  In fact, one can find it in other natural populations such as cows and honey bees, to name a few.  They also notably appear within the chambers of the nautilus shell, in the veins of leaves, and in the lengths of our appendages (crazy, but true and provable). Oh yeah, they also appear in the great pyramids of Egypt, so we should probably take note.  The numbers also posses what is known as the golden ratio, which is a proportion based on the quotient of two numbers in the sequence relative to the prior member.  The number we get is 1.618, which is also know as the divine proportion.  Remember the honey bees?  If you take any random hive and divide the number of females by the number of males, you will almost always come up with 1.618.  I can go on and on with examples, but I am eager to get back into the world of financial markets before the opening bell.  Quantitative traders and market technicians look for patterns in the trading of securities.  They often find natural points of support and resistance which are largely dictated by crowd psychology (I covered these in-depth on a Wednesday note a while back).  It turns out that we can apply the divine ratio to stocks and bonds, and they are quite accurate.  You need only glance quickly at the charts in my daily chartbook to see that price action congregates around those lines, which are the black horizontal dashed lined in the top panel of all of my charts.  The lines are calculated by taking a range of trading, and then drawing 5 horizontal lines at 0% (the low of the range), 38.2%, 50%, 61.8%, and 100% (the high of the range).  Those lines serve as natural support and resistance lines and they become increasingly important when markets are forging new ground with very little recent trading in a particular price range.  The most important take away here is that they work!  Whether the they work because of their divine properties or because many traders use them is not as important as the fact that they actually work.

Today, will be a volatile and what is looking like a positive session as traders put the election behind them and begin to wonder what split chambers mean for the economy and the markets. We have very little in the way of economic releases leaving the media, election maps, and a few pre-opening earnings releases to dictate market direction in the session.  As the markets will likely try to forge some new ground today, perhaps we can use nature to find some order in them. Perhaps Leonardo Fibonacci can help us.

daily chartbook 2018-11-07

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