Technical Analysis Summary for S&P, Dow Jones, Nasdaq:
· Double Top formation confirmed in all the key indices in US market - SPX, NDX and DJI
· The rally that happened in last two trading days is not to be considered resumption of uptrend, unless all indices convincingly break above respective all time highs.
Since hitting the all-time high in July, the three important indices retraced about 61.8% (happens to be a Fibonacci number). Following that, they all made an attempt to resume the bull rally, but the market was showing clear signs that the momentum was fading. By September, all three indices were near their previous all time high. However in spite of two attempts during the month to retest previous highs, SPX, DJI and NDX could not penetrate that ceiling.
From the images below we clearly see the double top formation, and how the second top is weaker than the first one.
In the mid of September, we see the market formed another double top inside right top of the big picture (see the highlighted oval in SPX Daily Price chart above). After those two failed attempts the market dropped to 2870 region, in the middle of prior congested demand area from August 2019.
However when we look at DOW Jones Industrial Average (DJI), we see the reversal also coinciding with 200 SMA, a significant indicator watched by investors worldwide. Usually for DJI, it takes multiple attempts to break below the 200MA line. In the past whenever DJI broke briefly below 200MA, it rallied back very soon. This time too, on 3rd October, it tested 200MA before initiating a rally which continued over next day.
NASDAQ100 is showing exactly similar pattern. Among the three – SPX, DJI and NDX, the last one was strongest for past few months. While the other two indices are much below the respective congestion area that was formed in last week of September, NDX already seems to have reached that level (7700-7800).
All the three indices have not technically entered downtrend. Their respective higher lows are intact. However all have shown signs of weakness – as they all failed to take their earlier highs out in the previous rally.
Given the way market is showing a double top, we are not going to trust the rally in the midterm. In intraday, we may see bullish days, but our outlook will be bullish only after all the indices break above their respective highs formed in July.
A more likely scenario is the markets will rally for a short while until all the three are in the intermediate supply area – i.e. 2980 region in #SPX, 27000 in #DJI and 7800 in #NDX. From here if the market does not get fresh impulse to rise higher, it will follow downward path, aiming for the demand areas from respective lows in June, as highlighted in the charts above.
Note of Caution
Please not that the volatility in the markets has gone up significantly over past few days. Trade with caution, as these markets can lead to larger than average losses. A prudent risk management strategy would be widening your stops, and taking smaller positions. And never trade without putting your stops in place.
Look forward to specific trading ideas during the week.
Track our live trade-calls linking back to detailed analysis and updates.