A deal could lead to faster economic and earnings growth, necessitating higher official interest rates from the Federal Reserve.
U.S. stock market futures spiked as soon as the news hit that the U.S. and China would schedule high-level trade talks in October.
My opinion does not count, but the opinion of someone who is apparently connected to the Chinese government does. China’s Global Times editor tweeted: “There’s more possibility of a breakthrough between the two sides.” Let’s explore the issue with the help of a chart.
Please click here for an annotated chart of S&P 500 ETF SPY, which tracks the benchmark S&P 500 Index. For the sake of transparency, this is the same chart that was previously published.
Note the following:
• The chart shows a “megaphone” top pattern.
• Bears have been making scary predictions, saying this is a bearish pattern and the stock market will fall to the lower trend line. This scenario would cause major losses for buy-and-hold investors who are fully invested.
• Bulls believe that not only there will be a breakthrough with China, but also that the Federal Reserve will be subservient to President Trump and aggressively cut interest rates.
• If bulls are right, the stock market will break above the rising trend line shown on the chart. This would be a new high for the stock market.
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What does it all mean?
I have previously written: “A megaphone top, when properly formed, can be useful in trading individual securities. However, the predictive power for a pattern that is not well-formed for the overall stock market is questionable.” I have also said that investors ought to be aware of the pattern, but there is no need for dread.
Start with Arora’s Second Law of Investing and Trading: “Nobody knows with certainty what is going to happen next in the markets.” Bulls believe that a trade deal will occur with China and the Fed will aggressively cut rates….Read more at MarketWatch.
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