By IFCMarkets

The quarterly earnings season is coming to an end in the US

After Donald Trump’s victory in the US presidential elections in November 2016, the S&P500 rose by 20%. At the same time, the profit of the companies from the S&P500 list grew by only 8% in Q3 of 2017 compared to Q3 of 2016. Is there a possibility for the S&P500 quotes to decrease?

An important reason for the growth of the US stocks was investors’ expectations that Trump’s new tax reform would significantly reduce the tax burden of the US corporations and improve their financial performance. Currently the reform prospect is vague, since the US Senate and the House of Representatives offer its various versions. The discussions on the reform may last until Q1 of the next year, and it may be postponed to the next year. The S&P500 quotes have been growing at a faster pace than the companies’ profits in recent months. The current P/E ratio (index capitalization/total profit of all its companies for the year) reached 22.6 and markedly exceeded the average multiannual value of 14. High P/E ratio is often a sign of a “overheated” market. Note that the corporate earnings season for Q3 is almost over in the US. The remaining companies are unlikely to significantly improve the overall financial performance of the S&P500.

On the daily timeframe, SP500: D1 remains in the rising trend, but currently its growth has slowed down and a number of technical analysis indicators formed bearish signals. A complete downward correction is possible in case of the publication of negative economic and corporate information in the US.

• The Parabolic indicator gives a bearish signal.
• The Bollinger bands have narrowed, which means lower volatility. They are tilted down.
• The RSI indicator is above 50. It has formed a negative divergence.
• The MACD indicator gives a bearish signal.

The bearish momentum may develop in case SP500 drops below the 5 last fractal lows and the lower Bollinger band at 2540. This level may serve as an entry point. The initial stop loss may be placed above the last fractal high, the historic high, the upper Bollinger band and the Parabolic signal at 2616. After opening the pending order, we shall move the stop to the next fractal high following the Bollinger and Parabolic signals. Thus, we are changing the potential profit/loss to the breakeven point. More risk-averse traders may switch to the 4-hour chart after the trade and place there a stop loss moving it in the direction of the trade. If the price meets the stop level at 2616 without reaching the order at 2540, we recommend cancelling the position: the market sustains internal changes that were not taken into account.

Summary of technical analysis

Market Analysis provided by IFCMarkets