Global stock markets experience short-term bear squeeze
Stock markets became oversold towards the end of September as they approached, or in some cases re-tested, August lows. It became apparent at this stage that we were likely to see a good bounce, and I advised our subscribers to exit shorts and buy into longs. It was a relatively easy call if you look at the charts below.
Firstly, Nasdaq futures had dipped to re-test the 50% Fibonacci support level, 100-week moving average and three-year trendline support, all in the same area as you can see in the weekly chart above. Combine that with a severely oversold indicator on the daily chart, and it was obvious there was a strong chance of a good recovery into the start of October.
The DAX futures gave us one of the clearest signals at the same time. The price re-tested four-year trendline support which had held so perfectly at the end of August, as you can see in the weekly chart below.
So it was fairly easy for us to recommend a buy signal at this time to our subscribers and fortunately we did see a nice strong bounce into the beginning of October as expected. The rally looks to have been helped along by a short squeeze, with many short-term traders incorrectly looking for further losses into October.
If we zoom into the daily chart for the Nasdaq you can see how the effect of the short squeeze saw prices rocket back up to strong resistance in the 4380/4390 area this week.
The chart clearly shows the reason why the rally has been stopped in its tracks. We recommended exiting longs here and trying shorts because there was multiple resistance coming from the 200-day moving average, three-month downward-sloping trendline and 61.8% Fibonacci level. When you look at how the slow stochastic had become overbought, it was a no-brainer to recommend exiting longs and trying shorts.
You can see that just above this level there is a longer-term trendline dating back to the beginning of April, coupled with the 100-day moving average, both in the 4405/4415 area. It would appear therefore that bulls would have to push above here if they want to see further gains in the market. This looks unlikely!
Going back to the DAX, let’s zoom into the daily chart for this market as well. This more clearly shows the double bottom pattern formation at the end of September, giving us an obvious buy signal in an oversold market. A good recovery took us towards the 38.2% Fibonacci resistance level at 10,207. However, we did not quite make it to this selling opportunity, topping out at 10,188.
We are in an obvious bear trend and, as soon as we became overbought, the bears stepped in. There were warning signs in the four sessions leading up to the peak with long upper shadows on the candlesticks, followed by the two dojis. Classic technical analysis warnings that the market was running out of steam, in overbought conditions.
Let’s move on to the E-mini S&P, which managed a strong recovery back up towards the 61.8% Fibonacci resistance and September highs at 2018/2021, as we became overbought. The bears were obviously keen to get back into short positions though, as the market stalled for three days at 2014. Eventually we got our sell signal on Tuesday as prices collapsed and took out the previous two days’ price action.
Further losses followed yesterday and, although we are seeing a small recovery as I write, bulls only look likely to begin to regain control with a break above 2021, but then we run into more trendline and 100-day moving average resistance at 2035/2038. Two major challenges here therefore.
We will finish up with a look at the E-mini Dow Jones. The daily chart below shows a bear flag formation over the last eight weeks. Prices have rallied towards the upper end of this bear flag, reaching the 61.8% Fibonacci level of 17,009. We ran a little further, reaching as far as 17,099, but we appear to have topped out well below strong resistance at 17,170 up to 17,220. The market now looks overbought enough to trigger further losses into next week.
We cannot rule out quite a strong collapse, perhaps as far as the lower trendline of the bear flag formation around the 16,100 area. If we do fall this far watch carefully because a break below here would be a break of the bear flag and would signal the start of the next leg lower in this developing bear trend.
So overall the outlook for global stock markets is more negative. Perhaps this short squeeze period is now ending and the longer-term bear trend can resume.
Jason Sen – Technical Analyst & Trader
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