Stock Market Breakdown Risk – Seeking Alpha

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The market is testing a year-plus uptrend with some reasons to take stocks lower.

First, the Chart

Source: Interactive Brokers

The S&P 500 (NYSEARCA:SPY) has hugged the middle line we identified with arrows. The market took a couple of spills over the last year, but mostly followed that clear uptrend.

Let’s Zoom In

Source: Interactive Brokers

Above is a closeup of the same chart. We are again hugging this exact uptrend.

Source: Interactive Brokers

Again, it’s the same chart — only this time we add one important overlay. Because the stock market has officially skyrocketed to the moon it’s not as simple to find a reference point. We drew a heavy horizontal dark line where we found “key action,” which defines an important price level. That price is about 233.3.

You can see that the market has converged to this critical point at an uptrend and a near-term horizontal support level. What it does from here should be a bigger move. We think that bigger move is lower.

Geo-Politics Can Break This Chart Down

North Korea

The main event that we think can break this chart down is the rift between the U.S. and North Korea. North Korea nonchalantly launched two missile tests this month and were surprised that anybody said anything. With a new U.S. president who is marking his territory, Trump actually said something, as did his VP Mike Pence.

Pence said:

The era of strategic patience is over.

We’re not sure how serious markets are taking these “fighting words,” but we think they are far from nothing. Weekends are typically a time for geopolitical surprises, and we think that especially going into weekends investors should be on guard for any escalation.

France

Marine La Pen is vying for a first round win. She’s promised a referendum to leave the EU. France’s exit would shrink the EU, which can force a reduction in the ECB’s bond buying and huge bond position. That would be a market negative. Leaving the EU would, of course, cause currency risk. Currency volatility has historically proven to destabilize markets causing risk.

Premium Has Been Short Since April 10th

We initiated the current SPY short position a little higher in our premium service, Pro Trader, at 235.36 on April 10th. While it’s come down a little, we think the price convergence and news could cause a break down here.

Conclusion: Support Lower

If we’re correct and the market does break, we see support around 225 SPY. Fundamentals are still decent with low inflation (negative CPI in the last report), stronger earnings growth this quarter, and low rates. For that reason, we want to be able to buy a dip rather than have to sell as the market goes down because we were too invested.

We think it makes sense not to be fully invested, and to be positioned to benefit from a dip if it were to occur rather than be forced to sell.

Disclaimer: ETFs reported by Elazar Advisors, LLC are guided by our daily, weekly and monthly methodologies. We have a daily overlay which changes more frequently which is reported to our premium members and could differ from the above report. Portions of this article may have been issued in advance to subscribers or clients. All investments have many risks and can lose principal in the short and long term. This article is for information purposes only. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC and their related parties harmless. Any trading strategy can lose money and any investor should understand the risks.

Disclosure: I am/we are short S&P 500.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.