Friday's Market Minute: Blow-Off Top Blown Off?

President Trump once again jolted markets with a Trade War tweet yesterday, sending equity indices soaring into new all-time highs and putting the hurt on bearish traders who wrote off the move as an attempt to juice a sluggish stock market open.

Major news outlets reported that the U.S. and China have agreed on a limited trade deal in principle that could be signed as early as today, with the U.S. reducing existing tariffs on Chinese goods and canceling those scheduled to start Sunday. In exchange, China will buy agricultural goods in 2020 and make other concessions.

While thornier issues like forced technology transfers and the Beijing’s heavy subsidization of certain industries are still on the table, the market seemed to like the news as yesterday’s move continued with another gap up after futures opened. However, keep in mind that the Wall Street Journal reported this morning that China has not yet publicly agreed to the terms. Examining S&P 500 futures on a daily timeframe, the RSI is showing strength as it exceeded its most recent high in tandem with price and is nearing the overbought area.

The MACD made a bullish crossover and the ADX is turning upward from a trough, suggesting that the trend is becoming more directional. Additionally, the /ES contract also closed outside the upper Bollinger Band, which is typically regarded as bullish.

Some have recently voiced concerns that this could be a “blow-off top,” or a buying climax that signals exhaustion of a trend – think of Bitcoin in late 2017. Warning signs of exhaustion typically include a very sharp rise in price on heavy volume, and the move could continue for some time before the equally sharp decline.

This doesn’t seem to be the case for equity index futures at this time, but traders should always be ready to adapt to changing trends.

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