Midweek Trading Outlook of US Markets S&P 500, NASDAQ, Dow Jones Industrial

Updated: Dec 13, 2019

Key Trading points for the week (US Markets):

  • Earlier this week, the three key US indices – S&P (SPY), Nasdaq 100 (QQQ) and Dow Jones Industrial Average (DIA) – tried to retest the all-time high they posted on 27th November

  • The US indices have been rejected from that high earlier in the week, DIA being the weakest among the three trading markets

  • Larger picture uptrend is intact, and the ~3% pullback last week was proved to be a small correction

  • However one should not fall in love with this uptrend as DJ Transportation Average (DJT), is diverging from the rest of the indices

The market until midweek remained strong after last week’s down spike move, and tried to retest the all time highs in respective indices. The most recent all-time highs were posted in the Thanksgiving week, on lower than average volumes.


DAILY PRICE CHART FOR S&P 500 ETF (SPY)

SPY Daily Price Chart

The Central Bank, Federal Reserves’ decision to keep key interest rate unchanged was as per market expectations, and the market showed little reaction thereafter. Fed’s comments on US economy were no different than those made during previous interest rate decisions. While highlighting strong labor market and improving household spending, Fed mentioned declining exports and investments as well as significantly low inflation that pose risks to US’ growth outlook.


The Technology Industry stocks heavy QQQ index also posted similar pattern, though overall it had been stronger than the other indices. DIA, the weakest among the US indices has not rallied as much as these indices have.


DAILY PRICE CHART FOR QQQ

QQQ Daily Price Chart

DAILY PRICE CHART FOR DOW JONES INDUSTRIAL AVERAGE

DJIA Daily Price Chart

A common feature we see in the price action in these indices is – they have consolidated close to the most recent supply areas and have not yet broken above. A break below the current consolidation – highlighted in blue dashed line – will take these markets lower, possibly towards the demand areas highlighted in respective trading charts. On the other hand, a break above the current consolidation will push the markets to make new all time highs.


Given the big picture where the market is still in uptrend, we continue to remain bullish. However one should not fall in love with this upside. In the big term picture we see a few interesting facts.


What do we infer from the fundamentals?


COMPARISON BETWEEN SPY, DJI, QQQ, DJT, US TRADING INDICES (WEEKLY)


COMPARISON BETWEEN SPY, DJI, QQQ, DJT, US TRADING INDICES (DAILY)

The above chart is comparison of the four key indices – S&P (SPX), Nasdaq 100 (NDX) and Dow Jones Industrial Average (DJI) and Dow Jones Transportation Average (DJT). Historically, DJT had been a leading indicator of the markets. Strength in DJT signals great need for transportation, suggesting increased trade activities and economies in good health. Weakness in the same suggests exactly opposite. Often the broader markets follow DJT on the cycle turns.


As we see above DJT has been the weakest one. While the other indices are posting higher highs, DJT has been posting lower highs in past few weeks. This is an important smoke signal, that reflects reducing cross border trade, especially between USA and China. As a result, a larger correction may be around the corner, perhaps in next quarter or so.


Trading Outlook Ahead for the US Markets


As we approach end of 2019 which was a great year for the bulls, the trend may be slowing down going forward and a correction may happen. While we are still in an uptrend, a savvy investor would start booking profits and reduce exposure to the downside. In the short term, we shall keep an eye on which direction the market breaks out from current consolidation, as both the scenarios are equally likely.

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