Important issues facing the markets this week
The E-mini S&P 500 topped out at the beginning of the year as we closed in on four-year trendline resistance. You can see this in the weekly chart below.
The daily chart below shows a relatively small recovery for the index this month. We have bounced 140 points from a low of 2552 to a high today so far at 2696.
You can see that the index is now approaching important resistance from the blue 100-day moving average at 2700 and a 16-month trendline at 2710. This is the first major test for bulls in this short-term recovery. It is also an excellent opportunity for anyone uncomfortably trapped in a long position to exit.
Therefore it is entirely possible that the market is about to start the next leg lower. That’s if we are in the early stages of a bear market, as many believe.
Take a look at the one-hour chart. This also has a potentially negative pattern in the form of a rising wedge. You can see we are testing the upper limits of the wedge which adds to the significance of the resistance around the 2700 area.
The lower trendline of the rising wedge is located at around 2670/2660 (depending on how long it takes us to get there). A break below this short-term trendline support, therefore, will be further negative confirmation.
The E-mini Dow Jones has seen a slow-but-steady recovery since the first day of this month, when the index bottomed exactly at the 200-day moving average support. The recovery of over 1400 points has taken the index up to an important resistance level, as we start to look overbought on the daily chart.
We have a trendline from the low of 9 November 2016, the day that Donald Trump won the US election. We broke below this trendline on a closing basis in the third week of March but, as I mentioned above, we bounced straight off the 200-day moving average support line. Now we are returning to test this trendline as a resistance at around 24,790/24,830.
To add to the significance of this area, we also have the blue 100-day moving average at 24,790. If this is, as I suspect, the beginning of a bear market, it’s highly likely the market will top out today.
The four-hour chart below also shows the index approaching strong resistance in the short term. The pink trendlines clearly show a downward-sloping channel. The two-week bounce has taken us back to this trendline resistance.
The darker purple lines show a rising wedge which can often be a negative pattern. But we must wait for a break below the lower upward-sloping trendline of this wedge pattern for a negative breakout confirmation.
So, failure at the upper pink trendline and a break below the 24,600/24,550 area should be enough to confirm a sell signal.
The one-hour chart below shows a close-up of that rising wedge pattern. I’ve added some short-term Fibonacci retracement levels to act as targets on the downside, for short positions: 24,410, 24,210, 24,050, 23,885 and 23,655. The big test of major support then comes again with the 200-day moving average at 23,550.
Watch for any negative daily or weekly candle formations to help confirm a top is in place. For example, a spike higher followed by a lower close on the day would be significant enough.
One thing that does concern me, and could trigger a downturn in the stock markets, would be continued rising interest rates. In the daily chart below you can see that US 10-year T Notes have been in a bear trend for at least the last seven months. (Although I must point out that the market actually peaked in the summer of 2016. It reached an initial trough in December of that year, so the bear trend is actually 21 months old.)
Note how the mostly sideways-trending action over the past two months has resulted in prices holding the upper trendline of the downward-sloping channel. This of course confirms that we remain in a negative trend.
You will probably remember this from a previous article, but far more important is the 34-year trendline support. This is now being tested in the mid-120 area. Note how the red 200-month moving average is only just a fraction below in the mid-119 area.
This is exactly where we bottomed last month. Bulls have, however, been unable to build a recovery as we sink back towards this incredibly important support. A sustained break below 119 is only the beginning of the bear market for 10-year T Notes. Therefore it is likely to result in significantly higher interest rates in the weeks and months ahead.
Technical Analyst & Trader
The content of this article is the personal opinion of the author and not Intertrader. You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.