Stock markets experience a summer correction
I have written two articles in the last two months for Intertrader.com about my outlook on the stock market. On 3 June I explained how May was in fact probably not the best time to sell stocks while mid-summer to early autumn has historically proved to be the best time, at least throughout my trading career since 1987. On 10 July I referred back to this theme with reasons why I thought we were due a stock market correction this summer. I am pleased therefore (as well as relieved!) to have seen my forecasts play out over the past couple of weeks. If you follow my blog, my tweets, my video analysis updates and in particular my daily reports you will know I was particularly vocal about my negative stock market outlook day after day and week after week.
The Dax has fallen almost exactly 10%, one of the worst performers of the markets I follow on a daily basis. Another one of my favourites is the Emini S&P which has fallen from 1985 down to 1903 as I write today. The VIX of course has spiked higher as we warned, in fact as much as around 70%.
A good time now therefore to review the charts and try to work out whether this correction has further downside or if all that cash on the sidelines is about to be deployed. The US markets have not suffered quite as much as some of the European markets. This may be because we are more likely to be affected by the sanctions placed on Russia. Although the European markets led the global markets lower I think we may have bottomed out and the US markets may now lead us higher into the end of August. Let me explain my reasons.
Above you see a weekly chart of the Emini S&P clearly showing the big correction from the end of July into the first week of August. You can also see we are testing a longer-term trendline and important Fibonacci support around the 1905 area. So far this week we have bottomed almost exactly at this price with a low of 1903. This also happens to coincide with the 100-day moving average and with the market now so oversold I think it’s time for bargain hunters to be stepping in and re-focus on the economy, rather than geopolitical events.
To back up my theory you can see in the chart above how the mini Dow Jones broke the big rising wedge pattern as we had expected and plunged through the 100-day moving average (blue line) almost in a single day. However the pink line represents the 200-day moving average and this did an excellent job of supporting the market in the middle of the week. I think that this has marked a low for the correction at this stage and we will at least push back up to the blue line. I would not be surprised to even revisit that lower trendline that you see in the chart but this would be an excellent selling opportunity as I believe the autumn could see prices crashing down again below the point that we are at today.
Let’s now have a look at the Dax which has taken such a big hit after the failure to break through that big psychological 10,000 level.
The weekly chart above shows how losses accelerated once we broke below important trendline and Fibonacci support. As we had expected this triggered big stop-loss orders in the market and we have come down as far as April lows and Fibonacci support at 9068. So far, as I write we have bottomed almost exactly here at 9031 and although this bottom is not as convincing as the US markets, I do think that we can recover from here now and will follow the US markets higher into mid-August and possibly into early autumn.
However my longer-term outlook remains negative and I think what we’ve seen over the past couple of weeks is a warning as to what will happen into autumn. My belief is that this move higher now should be treated as the last opportunity to exit stock markets and enter short positions. I’m certainly not ruling out a very significant move to the downside before the end of the year and (dare I say it?) a strong chance of a stock market crash.