The stock market has been volatile, causing confusion among investors.
It started last week when President Trump announced the imposition of new duties on $300 billion worth of Chinese goods. China retaliated by lowering its currency below a key level. The Dow Jones Industrial Average DJIA, +0.69% fell almost 1,000 points before paring losses. The U.S. responded by declaring China a currency manipulator. Dow futures slumped another 600 points. Then China attempted to defuse the situation by saying it’s not a currency manipulator. That helped futures. And China said a weakening yuan wasn’t a response to Trump’s new tariff threat. The Dow rose 270 points.
The reason we are talking about futures is because much of this action occurred after-hours. The saga goes on.
What could help you, an investor, navigate this market? Let’s examine the issue with the help of two charts.
Charts
Please click here for a chart of S&P 500 ETF SPY, +0.86% after the market’s fall.
Please click here for a chart of the same ETF that was published before the market’s decline.
Note the following:
• The first chart shows that The Arora Report gave four signals before the drop.
• The four signals include short-selling Nasdaq 100 ETF QQQ, +1.09% or buying leveraged inverse Nasdaq 100 ETF SQQQ, -3.25%, which rises when the market falls; increasing hedges to protect portfolios; taking profits on select ETF positions in our ZYX Global portfolio; and taking profits on a China ETF ASHR, +1.52% in our ZYX Emerging portfolio. ETFs on which profits were taken include semiconductor equities ETF SMH, +1.29%, technology equities ETF IYW, +1.29%, China internet equities ETF KWEB, +1.20%, frontier markets ETF FM, +0.29%, small-cap Japan equities ETF DXJS, +1.17% and large-cap currency-hedged Japan equities ETF HEWJ, +1.23%.
• The first chart shows that the stock market went to the second stop zone before bouncing.
• The first chart shows that the volume has been much higher during the decline. This is bearish in the medium term.
• The first chart shows that the relative strength index (RSI) is oversold, as indicated by RSI falling below the yellow line shown on the first chart. This suggests at least a short-term bounce as of this writing. However, things can rapidly change.
• The second chart that was published before the market drop shows four support zones.
• The market fell quickly through the first support zone but, as of this writing, the second support zone has held.
• To learn about support zones shown on the second chart and how to use them, please see “Why you need to understand support zones in the stock market.”
• Apple AAPL, +1.73%, because of its presence in China, should be carefully watched. Apple can easily become a pawn in the game. The risk in Apple’s stock is significantly higher than generally anticipated by investors at this time. For this reason, investors may want to watch support zones on Apple.
• Large-cap technology stocks have been the market leaders. For this reason it makes sense to watch support zones on stocks such as Amazon AMZN, +0.52%, Facebook FB, +1.59%, Microsoft MSFT, +1.51% and Google GOOG, +1.68% GOOGL, +1.57%.
• Semiconductor stocks are sensitive to China issues and have often given advance indications. For this reason, it makes sense to watch support zones in AMD AMD, +2.64%, Micron MU, +1.12%, Intel INTC, +1.03% and Nvidia NVDA, +0.79%.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
If you could watch one thing, watch the support zones. As long as the second support zone holds, this is a garden-variety correction. If the market breaks the third support zone, it will be cause for concern. If the fourth support zone is decisively broken, significant protective measures should be taken. The ferocity with which the market fell through the first support zone indicates that the risk is much higher in this market than generally accepted by investors at this time.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.