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US stock market short-term outlook deteriorates

My article last week focused on how US stock markets were lacking clear direction and, despite the fact that new all-time highs were being reached, a burst higher looked unlikely. After struggling for three months, the US stock markets are now potentially facing a more significant move to the downside.
The E-mini S&P took almost three months to beat the all-time high set in February 2015, but I showed you how the price was trading within a channel represented by the green trendlines you see in the chart below.
In my last article on 18 May, we were just re-testing this upper trendline for the first time in May and you can see that we spent five trading days unable to close above here. With the market so overbought a correction was overdue and finally the market crumbled yesterday on 26 May. The black four-month trendline at 2090 is now the key area of support. It looks likely to hold on the first test, which might be seen this week, but I would be concerned about a break lower, perhaps as soon as next week.
We could then target the 100-day moving average support at 2075/2070. This will be the most important level in the month of June as a break below here also breaks the lower green trendline of the channel. This is likely to trigger stops and sell orders in the market and could see the May low of 2057 broken quite quickly to target the 200-day moving average and March/April lows at 2038/2033.
The E-mini Nasdaq hit a 15-year peak in April, and then suffered a decline of about 5% over the following two weeks, but we spent most of May trying to recover this loss. However, the peak of this recovery was 13 points below the April peak of 4555 and, after yesterday’s aggressive sell-off, we have a potential negative double top pattern in place.
This chart also has a black four-month trendline which is intersecting with the 55-month moving average (the purple line above) at 4420/4415. This is our next main downside target and support for this market. We do need to unwind severely overbought conditions, just as we did at the end of last month. There is a good chance of a repeat of this move at the end of May and a break below the four-month trendline could then trigger a test of the 100-day moving average at 4360. A break below the May low at 4332 could confirm the negative top pattern and target March/April lows at 4270/4262.
The E-mini Dow Jones this week managed to beat the previous all-time high of 18,270 set on 2 March. However, having only managed to beat this by 64 points, the market has turned around and sold off quite aggressively this week. This leaves a potentially much bigger negative double top pattern in place than we see in the E-mini Nasdaq and the market has already tested the four-month trendline, yesterday on 26 May.
The outlook for this market is more negative than for the S&P or the Nasdaq and so a break below this trendline at 17,960 is looking increasingly likely. We should then quickly target the 100-day moving average at 17,850 and if this does not hold we could be re-testing May lows at 17,630. This is not particularly strong support so a break below here cannot be ruled out. We are then likely to target the 100-day moving average at 17,530 with March/April lows just below at 17,475/465.
A short-term shake-out is all part of a healthy bull trend and, at this stage, all I’m looking for is a bull market correction. At some stage this should present good buying opportunities within the bull trend, but we will have to watch carefully for the signals telling us that the bottom has been reached.
A lot depends on how fast the correction is to the downside. A slow modest correction may only take the indices as far as a re-test of the May lows, but a swifter more brutal correction could see a re-test of the March/April lows. A break below this point however could be more serious and, don’t forget, many of the bear markets and crashes that we have seen over the last 30 years have started in the middle of the summer.
Jason Sen – Technical Analyst & Trader
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The content of this article is the personal opinion of the author and not Intertrader.com. The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.

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