Stock markets ready to collapse?


Jason Sen

Stock markets have seen a good bounce from the lows in the first half of February. The E-mini S&P 500 recovered almost 260 points from a low of 2530. There is a good chance we are seeing the start of a medium-term bear trend after making a recovery high of 2789/90. This was followed by a break of the two-week upwards trendline to test the short-term 23.6% Fibonacci support at 2691/89.

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If this is the start of a bear trend, as I suspect, a break below 2685 targets quite important support on the daily chart at 2675/73. A break below 2670 acts as a longer-term sell signal. We are likely to test important 200-day moving average and 11-month trendline support at 2560/50. A break below 2525 acts as another very important longer-term sell signal and confirms a longer-term bear trend.

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E-mini Dow Jones reached a peak of 25813 on the bounce last week. It then sold off quickly to the two-week trendline and 38.2% Fibonacci support at 24870/860. Although we bottomed exactly here as I write, it does look like we are starting a bear trend.

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A break below 24800 therefore serves as further negative confirmation targeting the 24500/400 support area. While this may hold initially, a break below 16-month trendline support at 24240/24220 eventually acts as an important sell signal. This would likely re-test the February correction low at 23100/088.

The DAX 30 looks very much like it has started a bear trend, unable to make a significant bounce after the early February correction. In fact we fell at the second Fibonacci hurdle of 12550.

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We have been holding below the red 200-day and blue 100-day moving averages ever since. This is always a negative signal. Watch for a re-test of the 11900 level with a break below to act as an important longer-term sell signal. A break below the 100-week moving average at 11700 acts as the next sell signal.

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Note how we have short-term negative confirmation from the break of two-week trendline support at 12450 and 23.6% Fibonacci support at 12300.

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The FTSE 100 took a hammering from mid-January, losing almost 900 points. It bottomed, however, exactly at the 38.2% Fibonacci support at 6870/60.

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A relatively slow three-week bounce saw a 50% recovery take us back to the 7300 area. This coincided nicely with the 11-month trendline you see in the daily chart below. We topped exactly here to signal the bear trend is in place and this is more than just a bull trend correction now. Note how we got nowhere near the blue 100-day and red 200-day moving averages.

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If we start to hold below the green 500-day moving average at 7035 in the days ahead, this will act as further negative confirmation. Of course a break below the longer term 38.2% Fibonacci support at 6870/60 acts as another sell signal. This would initially target 6800/6790 and 6730.

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Jason Sen

Technical Analyst & Trader

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