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US stock markets approach important longer-term support levels

The E-mini S&P made a new record high in September at 2022.50 but has fallen sharply from here over the past two weeks. This index has broken below the 200-day moving average on three previous occasions this year. In January it held below this line for just three days. In April it held below for just two days and in August just one. Yesterday on 1 October the index dropped below the 200-day moving average for the fourth time this year. The question is whether we are witnessing just another small correction in a bull trend or something more negative. The key to this lies with the 15-month trendline you see in the weekly chart below.

As you can see this trendline is very well established and has held on four separate occasions. You can also see that we are testing this trendline as I write. The daily chart is also quite severely oversold just as it was on every previous occasion that we got a strong bounce off this trendline. The odds favour the bulls therefore and this should be seen as a very good buying opportunity in a bull trend. However a break lower would obviously have much more negative implications and it would be reasonable to expect a retest of August lows at 1890.
The E-mini Nasdaq has suffered a similar fate over the past two weeks with a strong correction that has actually broken below a five-month bull trendline. However this is not quite as negative as it sounds and we are still some 80 points above the 200-day moving average. This year has seen a good rally from a low in April of 3405 up to a high of 4127. The recent correction has only retraced 23.6% of this rally. A 23.6% correction is a healthy move in a bull trend and this area should also act as important support especially when you consider that prices are now oversold and this is the first test of the important support level around the 3955 area.

The Mini Russell 2000 chart below also clearly shows how we are testing the lows for this year at 1078, in fact bottoming almost exactly here yesterday at 1077. The two previous lows in February and May will need to hold or again a more serious move to the downside could be seen and we will then have to watch what happens on a test of the 100-day moving average at 1049.

I have to say that the pattern that is building this year looks to me to be particularly negative and sooner or later a break below 1077 does look likely and I’m concerned that this will trigger very heavy selling pressure. When it comes we could witness a severe move to the downside but I am not sure this market is ready for that move just yet. However I certainly would not be surprised to see this happen later in October.
October is etched in many traders minds as a month often associated with significant moves to the downside and even a crash. It is not uncommon for markets to wobble in the autumn and I wrote an article for earlier in the year looking back over the past 25 or 30 years to examine the likelihood of another big move to the downside in stock markets this year.
I do think there is a very strong chance of another significant move to the downside before the end of this year but my feeling as I write today is that this two-week correction is over and there is a good chance of a bounce off these important support levels. I also have a very strong feeling that if we do get the bounce I expect that this may be the last chance for bulls to exit the market before a significant move lower. If I am right I will be watching very carefully over the next month or two for potential topping patterns which will give me a medium-term sell signal.
If however these major support levels are broken and we get a weekly close below them on Friday 3 October it is likely that the significant move to the downside will hit us sooner rather than later.

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