How Wall St Crashes Exhaust Themselves?
This always happens. At some arbitrary point of every uptrend the rally reveals its vital, profit-seeking and greedy nature in the form of normal profit-taking, which comes as a mighty and mesmerizing price fall. This kind of a big drop becomes known as a Black Monday, or Black Friday, a specific day of the week doesn't matter. Margin trading effects may increase the bearish momentum. Yet, on the next stage of the correction move, this sharp step down is followed by dip buying splashes to rebound on speculative short covering. These bullish hopes and bearish fears for recovery are usually less coordinated or rather badly synchronized in time compared to the initial sell-off.
The whole process of the stock market's round trip there and back needs days or weeks, but ultimately a sequence of up and down price moves is forming a technical pattern, which usually allows smart investors to identify the moment when the current type of market correction confirms it is mostly exhausted. Sometimes a reversed head-in-shoulders price model on smaller time frames plays the role of a sign to stop selling and start buying. But most commonly, price attacks to major support areas are simply running out of steam, without reaching new dips, to form a slightly ascending series of intraday lows, day after day. And so, this is approximately what most analysts from large financial institutions and experienced private traders are waiting for on the charts to start massive buying again.
Exceptions are possible but rare, like it once happened in August 2015 when one week led the S&P 500 index down on China-related worries but already the next week cured the market from all its worries producing a very fast comeback. This kind of instant push-ups cannot be ruled out, and so some moderate volumes of adding to buy positions in giant techs of AI-related stocks are reasonable. However, no particular pattern to reverse the uncertainty to confidence is on the charts, including bellwethers like NVIDIA, Apple or Microsoft or broad market barometers of Wall Street like the S&P 500 and the Nasdaq Composite futures.
Based on a balanced approach, we are not expecting an immediate burst of purchase activity in the U.S. or in Europe, letting each detail of price charts to speak for itself, one by one, before making conclusions that a sell-off has passed at last. This means a range trading on the S&P 500, with possible lower margins now at nearly 5,100 (but easily could be extended to below 5,000 for a while) and 5,300-5,350 to cap from above, is a basic trading technique for the time being until proven otherwise. Buying some fresh dips in popular stocks do not contradict this stories, when keeping transaction volumes restricted and under strict money management control, yet hedging strategies like short-term selling in the S&P 500 futures could also become a strategic decision, unless the S&P 500 finishes drawing some clear upside reverse pattern on charts to remove all doubts. Two days without new falls passed by but probably nothing is over, according to our baseline scenario.
Some large investment houses are following a similar rule. JPMorgan said it believes the liquidation of recent carry trade longs in the Japanese Yen's territory is just nearly half completed. "We have not done yet", they wrote in a client's note, which is still valid even though the Bank of Japan's deputy governor, Shinichi Uchida, partially soothed the markets by saying that his colleagues are not going to hike borrowing costs once again when markets are unstable. Another example is Citigroup, which emphasized that its checklist of bearish market signs gave 8.5 out of 18 red flags when back dropping from recent all-time highs on U.S. stocks. Therefore, Citi analysts shared two conclusions. One of them suggests buying into market weakness could be an actual practice soon. But the second thought was they prefer to "wait for evidence of a more complete positioning unwind and a potential stabilization in earnings momentum before doing so".
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