Global stocks are more likely to be climbing up a slippery wall of worry

The current post-Christmas rally of 9% to 13% seen in global stocks from developed and emerging markets has been built on the following narratives;

• An optimistic outcome that U.S. and China will resolve their trade tensions before the 01 Mar 2019 deadline.
• Number of increasing “Fed talks” from officials that advocate patience in raising future Fed funds interest rates.
• Assurance from China central government to enact expansionary fiscal policies to boost consumer spending and a subtle easing of monetary policies to stall the increasing pace of corporate bond defaults seen in the last 6 months.

In this article, we will use a “bottom-up” approach in technical analysis to examine four key bellwether stocks to decipher whether the on-going rally seen in global stock markets is a “V-shaped recovery” to kickstart a new bullish impulsive phase or a corrective rebound before another leg of bearish impulsive down move resumes.  

FedEx Corporation (NYSE: FDX)

FedEx, a global courier delivery services company that is dependent on the business cycle of the global economy. On 18 Dec 2018, the company slashed its earnings outlook for fiscal year 2019 just after an upgrade three months ago due to concerns of a deceleration in international trading volumes for import and export activities.

From a technical analysis perspective, several negative technical elements have emerged;

• Its price action has staged a bearish breakdown below its long-term secular ascending channel support from Oct 2011 low now turns pull-back resistance at 182.95 (see weekly chart).
• The monthly RSI oscillator has continued to inch downwards after a bearish divergence signal at its overbought region and has not yet reach its oversold region. In addition, the weekly RSI oscillator has bounced off from its oversold region but without a bullish divergences signal, where such signal has materialised before the start of a bullish impulsive up move phase for its price action in the past (Oct 2011 & Jan 2016). In addition, the weekly RSI remains below a significant resistance at the 46 level.
• Key long-term pivotal resistance stands at 227.40 which is defined by former range support from Feb/Jun 2018 before the steep decline that occurred in Dec 2018 and 61.8% Fibonacci retracement of the entire down move from its all-time high level of 274.66 printed in Jan 2018 to its Dec 2018 low of 150.94.
• Thus, at risk of shaping a further potential impulsive down move towards the 125.70/119.25 which also confluences with the long-term super cycle ascending trendline from May 1978 low.

Amazon.com Inc (NASDAQ: AMZN)

Amazon started its business operations in selling music, videos and books via online prior to the 1999/2000 dot.com bubble era. Right now, it has transformed into a mega juggernaut which spans into various operations such as e-commerce, cloud computing and artificial intelligence.

Its e-commerce platform is the largest in the world as measured by revenue and market capitalisation. As at 18 Jan 2019, Amazon is the most valuable company in the world by market capitalisation ahead of Microsoft, Google/Alphabet and Apple.

Therefore, it is a necessity to pay close attention to its price action as any significant movement will have a drastic impact via adjustment in weightage holdings of passive investments (exchange traded funds) that can create a drastic feedback loop into the general market given the increasing inflows into such passive investments in the last three years.

• Despite the recent 36% plunge from its all-time high of 2050.50 printed in Sep 2018, the long-term secular uptrend from its Nov 2008 low of 34.68 remains intact.
• However, upside momentum of price action has started to deteriorate where the weekly RSI oscillator has traced out a bearish divergence signal at its overbought region while price action surged to an all-time high in Sep 2008. The recent rebound since in the RSI after the corresponding decline in price action seen during Oct/Dec 2018 has not traced out a prior bullish divergence signal and it has not reached its oversold region.
• Therefore, a break below 1195.30 (the ascending channels support from Nov 2008) may trigger another round of impulsive down move towards the 804.70/710.10 support (also the long-term super cycle ascending trendline from Jun 1997 low).

 Caterpillar Inc (NYSE: CAT)

Caterpillar can be considered as a bellwether of the global economy because its role as the largest construction equipment manufacturer and a supplier of key industrial equipment. Thus, its revenues are dependent on the health of the global economy and the commodity cycle.

In addition, Caterpillar has also developed a significant global supply where it comprises 157 suppliers, 65 customers and 28 business partners that spans 37 countries based on data compiled FactSet. 

• The recent plunge of 35% from its current all-time high of 173.24 printed in Jan 2018 has managed to stall at a key major support of 115.05.
• However, the weekly RSI oscillator has not flash a bullish divergence signal at its oversold region where a previous bullish divergence signal seen in Jan 2016 (there the decline in price action has also stalled a major support; the ascending trendline from Mar 2009 low) that led to a new bullish impulsive up move phase in price action.
• Thus, mix elements at this juncture. A break below 115.05 may see a further downside towards the next support at 79.50 (the long-term secular ascending trendline from Mar 2009 low). On the flipside, a clearance above 150.00 is likely to open up scope for a potential fresh impulsive up move to retest 173.24 before targeting the next resistance at 205.80/211.70

Tencent Holdings (HKG: 0700)

Tencent Holdings, a technology conglomerate based in China where its business operations span across the spectrum of internet related services and products from social network, e-commerce, web portals, music, payment services and gaming (mobile & online).  It operates and control a significant market share of social network and mobile payment services in China, the second largest economy in the world via its WeChat app.

In addition, it is also the world’s largest gaming company and one of Asia’s most valuable companies where its market capitalisation stands at HKD 3,236.90 billon as at 22 Jan 2019, joining the ranks of others tech juggernauts such as Apple, Amazon, Facebook and Google/Alphabet.  Thus, its revenue flows are dependent on consumer sentiment which in turn tends to lead the global economic cycle. 

• Technical elements remain negative at this juncture since the bearish breakdown from its primary ascending channel support from Oct 2011 low in Sep 2018.
• The recent rebound of 36% from its Oct 2018 low of 251.40 has evolved into a bearish “Ascending Wedge” range configuration with its upper limit now acting as a resistance at 360.00.
• The key long-term pivotal resistance stands at 390.60 which is defined by the pull-back resistance of the former primary ascending channel support from Oct 2011 low and the 61.8% Fibonacci retracement of the entire down move from its all-high of 476.60 printed in Jan 2018 to its Oct 2018 low.
• The weekly RSI has exited from its oversold region but without any bullish divergence signal and remains below a corresponding significant resistance at the 58 level.
• Therefore, a break below 317.85 (the “Ascending Wedge” support) may trigger a potential fresh impulsive down move to retest the Oct 2018 low of 251.40 before targeting the next support at 220.80/218.20 (also the long-term secular ascending channel support from Oct 2008 low).

Conclusion

Based on the abovementioned key technical analysis highlights of the 4 bellwether stocks, it will be wise to adopt a prudent approach at this juncture rather than chasing the up move seen global risk assets.

Playing defensive and a dose of scepticism may be a more favourable strategy as global stock markets are climbing up a slippery wall of worry.

Charts are from eSignal