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Thursday, 10 August 2017

Geo Political tensions trigger stock market correction

August 10th 2017 - The biggest fund managers in the world are suggesting that it’s time to reduce the risk by exiting high yielding bond positions and equities and start buying treasury bonds. They are obviously reacting to increasing tensions between the US and North Korea. However, there are also clear technical signs that the stock markets are ready to correct lower. We have been monitoring the German DAX and the American DJIA 30 for some time as they have started to show signs of instability. While US stock indices have moved higher the market internals have been less supportive. Sector analysis reveals how fund managers have been cautious in their positioning amidst the recent stock rally. While the indices have moved higher the funds have been flowing away from financials and into the relative safety of utility stocks.

After rallying for 10 days in a row the Dow Jones Industrial Average (DJIA 30) index created bearish rejection candle on Tuesday. The market rallied higher as the US JOLTS Job Openings came in at better than expected levels. This rally was however soon faded by the traders after the US President Donald Trump made his fire and fury comments where he threatened North Korea with strong response. This resulted in a down day and created sell signal in the daily chart. This type of behaviour after a strong rally is bad news for the bulls. This resulted also in money fleeing into Gold, the traditional safe haven market.

With the weakening in the technical picture coinciding with high valuations in the stock markets and increasing geo political tensions and central banks reducing stimulus the probabilities for a correction in the DJIA have increased significantly. At the time of writing the market has eased slightly off from its high two days ago (0.85%). This hardly attracts anyone to buy the dip or to search for value. However, a correction to the next significant support level (some 2.3% lower than the recent top) could attract technical traders to buy in hope of a short term bounce.

We believe that there is a high probability of shorting opportunities in appearing in DJIA. We therefore look for sell signals after rallies in the index with a view of covering the trades near the major support at 21676. Intraday support and resistance levels near the current price are as follows.

Supports and Resistances: 21960, 21980, 2204, 22020 and 22054.  


Janne Muta
Chief Analyst
TradeCompiler Research Ltd.

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