How to Head Off a Recession
Today we’re looking at the factors conspiring to create the coming recession. Yes, we said the “R” word, but don’t panic just yet.
While we don’t see a recession on the near horizon, one is inevitable eventually. According to Kiplinger, since World War II, we’ve averaged one economic downturn per five years. So when COVID struck, we were already long overdue.
But if you pay attention to key indicators that show you where and how the market will perform, then you’ll be better prepared to weather a recession – and even profit during it. We’ll reveal those factors and help you understand a few basic terms along the way.
The Global Economy Sputters
Lingering pandemic effects… global conflicts… supply chain woes…
These are just a few of the factors behind the global economy hiccups. China continues to mandate citywide COVID-19 lockdowns (while protests ensue) – and the global supply chain, particularly in the technology sector – is feeling the pinch. Likewise for the energy and grain sectors when it comes to the war in Ukraine, which supplies 40% of the world’s grain.
In the United States, things look better, with a strong job market and high consumer spending propping up the economy.
But since the pandemic, companies that have slashed their workforces have dominated headlines. In 2022, we saw major cutbacks, particularly in the tech sector, and the market reacted strongly in some cases. Companies like Apple Inc. (AAPL), Amazon.com Inc. (AMZN), and Twitter, which went private after Elon Musk took over, are laying off swaths of their staff.
But while the media covers these seemingly alarming stories, keep in mind that sectors like retail, manufacturing, and leisure and hospitality are facing major labor shortages, and the unemployment rate remains at an incredibly low 3.7%. The fundamentals are strong and don’t seem to be yielding to other economic pressures right now.
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Support and Resistance as Key Market Indicators
Today we issued a trade alert, and in it, reassured Strategic Trader readers, “Despite slowing momentum, we are still feeling confident that the underlying fundamentals in the economy are strong enough to keep the market above support.”
We covered those strong fundamentals above… but it may be unclear to new traders what “support” means.
Support and resistance refer to how supply and demand affect the market. When the overall market experiences enough demand to keep prices from falling further, the market has reached support. As prices drop, buyers become more inclined to buy, and sellers are more inclined to hang on to their shares, in the hopes that they will increase in value.
As demand overwhelms supply, prices increase, and the desire to buy decreases. When there is more supply than demand in the market, it will reach a level of resistance – the opposite of support.
Once these support and resistance levels are determined – whether for a specific stock or the overall market – they can serve as barometers of when best to buy or sell. As the price of a stock or the S&P 500’s value index, for example, reaches previous support or resistance, it can either retract from the support or resistance level or keep going in its prior direction until it hits the next milestone.
For example, in the following 2022 S&P 500 chart, market resistance (think about bumping your head on a low ceiling) follows the top blue dotted line. Support follows the blue dotted line on the bottom.
Right now, you’ll notice that the market trend is challenging resistance, which we’ll keep a close eye on. Using these trends can help traders predict where the market will go next – and how the economy, the media, global trends, and other factors can influence stocks.
It’s not a perfect science, but it’s a worthy tool for your trading arsenal.
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