By Hao Sun
Donald Trump’s presidency was considered by many market commentators to be one of largest black swan events of last year. The US stock market, instead of reacting negatively as many had expected, posted a solid four-month rally since his election victory, despite the series of political mis-steps in the lead up to the election.
In the latest crisis, Trump is again dominating the headlines this week after the surfacing of a memo from recently fired FBI chief James Comey which indicates Trump’s political interference in the FBI investigative process may have been even deeper than previously suspected.
But as traders, it’s not our job to respond to the political issues themselves, but rather to attempt to analyse how the markets might react in the coming days or weeks. What we need to know is whether the ongoing Trump turmoil will trigger the beginning of a large pullback of the US stock market, or just a mini shakeout of the weaker companies in the market?
Let’s look to see what we can find out from the charts. Out of the three major US indices – US30, SPX500 and Nasdaq100 - let’s focus on the SPX500 as it represents the broader market overview.
On the monthly chart, there is no doubt that the longer-term uptrend remains intact, with a well-defined trading range on the daily and weekly charts for more than two months. So what is the impact of yesterday’s Trump-driven selloff? It seems to merely confirm that price is moving from the top to the bottom of the consolidation as indicated on the chart below. What is my near-term trade plan for the US stock market? As the downward momentum is only just beginning, I anticipate the market will test the bottom of the consolidation in the coming days. Which means the ideal situation for me will be to look for shorting opportunities. Dupont is one of the stocks in my stalking list. Dupont is performing more weakly than the SPX500 trend, and has strongly breached the bottom of the consolidation range on the daily chart yesterday. If price pulls back to retest 77.40 - the breakout level of the consolidation - then I will be keen to look for a potential short trade setup from either the daily or four-hour time frames.
Once the SPX500 reaches the bottom of the consolidation around 2,325, then I will see if it confirms support and starts to rally. If that is the case, I will again be looking for US stocks for long trade opportunities, because the longer-term momentum is still strongly bullish on the weekly and monthly time frames.
McDonald’s is one of the strong stocks that I am tracking closely as it is up trending across the monthly, weekly and daily time frames. Yesterday’s selloff can be explained as a pullback on the daily chart, which is healthy for any sustainable trend. Once the price pulls back into the moving average buy zone on the daily chart, and if the SPX stabilises at the bottom of the trading range, then that will be a good time to combine other technical factors to see if price is offering an opportunity for a long trade.The headlines may be yet again trumpeting “Trump Presidency in Crisis.” Maybe this is the ultimate crisis for the president - or maybe it isn’t. We don’t yet know either way. What is important is to ignore the distractions of the headlines, and focus on trading what is revealed in the charts.