US stock markets may have ended the one week correction.
Emini S&P has suffered five days of losses in a row since 30th December 2014 – something not witnessed for two years since December 2012, but that drop was less severe.
Yesterday, Tuesday 6th January, we hit big support levels at 1985 from three sources. Firstly a longer term trend line dating back to October 2013, secondly the July 2014 high and thirdly a 38.2% Fibonacci retracement level from the October low at 1813.
We are still in a longer term bull trend as prices become oversold on the daily chart. We are severely oversold on the short term charts now so it would be reasonable to expect buyers to support the market at this stage. If we can now start to hold above the 100 day moving average at 2000 this should encourage a recovery in to mid January at least. However looking at the chart above one has to wonder if the bounce will fall below the all-time high at 2088.75, and perhaps not even make it as far as the early December high at 2079. This would leave a clear negative head & shoulders pattern in place which would have much more negative implications for this stock market.
It is a similar picture for the Mini Russell as you can see in the daily chart below.
A steep sell-off took over half as long as the recovery from the mid December low of 1133, to test 100 & 200 day moving average support at 1151/1147. This held perfectly yesterday and I believe should trigger further buying in to the end of the week. However my concern is that we will either fail to beat late November highs 1995 to form a negative head & shoulders or, if we do make it higher,we will form a negative double top around the all-time high at 1220.
The Emini Dow Jones chart is very similar to the Emini S&P so requires little further explanation, but again the risk of a head & shoulders pattern forming in to the end of January is high in my opinion.
European markets already look like they may have peaked ans turned a corner. The daily Dax Future chart below has a potential double top pattern from the high in mid 2014 at 10,049 and early December at 10,127. We have already seen this market fail to retest the all-time high on the bounce from the December correction. Could this be signalling the start of a bear trend?
The FTSE Future chart perhaps looks even more negative than the Dax. Since September we have three eclining peaks in November and late December. If we manage a bounce along with US stock markets in to mid January we will at least need to get back above the 100 day moving average and late December peak at 6590/6615 for a more positive outlook but there are still at least of couple of big obstacles above this level.
I think the lower oil price is a positive for the global economy as a whole and I do not believe that this bout of selling has been triggered by the collapse in its price. Oil has been heading south for many months and will help China and other net importers of oil. However the worry is that contagion from the Russian economic slowdown and rouble collapse will spread throughout Europe and add to the mounting problems for the euro area.
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