Stock markets still lacking clear direction
We all know that stock markets are experiencing one of the longest bull runs in history. Since the financial crisis of 2008 the world has seen unprecedented liquidity trigger remarkable gains. We are now entering the seventh year of the bull market, which started in March 2009 and has seen the S&P 500 index more than triple in that time.
However in the last three months bulls appear to have lost their momentum. The E-mini S&P hit an all-time high of 2117.75 on 2 February 2015 and has only just managed to beat this level for the first time this week, almost three months later. On 18 May we made a new all-time high of 2128.75, indicating that bulls may finally be re-exerting their dominance.
It’s not all blue skies just yet, as you can see in the daily chart of the E-mini S&P above. In the last 1½-2 months it appears we have been trading within a gently upward-sloping channel, as highlighted by the green trendlines. Monday’s new all-time high has tested the upper trendline of this channel and we must see a break and close above here during the week in order to fully reignite the bull trend. We could then look to target 2147/2149 and 2160/2165 in the days and weeks ahead.
The Dow Jones is, unsurprisingly, a similar picture to the S&P. Again the market corrected into the end of March and beginning of April, experiencing a setback of around 800 points, but also recovered into mid-May. Only this week on 18 May did we finally see a break above the previous all-time high set in February.
Although both markets are now starting to look more positive, a big burst higher after a period of stability looks unlikely. I’m expecting more of a slow grind as we battle overbought conditions and I don’t think it will be a smooth, easy ride for the bulls. Over the next days and weeks for the E-mini Dow Jones I have set targets of 18,350/360, 18,410/420 and 18,470/480.
It is important to note that to confirm a bullish breakout we normally look for increased volume and a strong close above the previous all-time high. At the moment we are not quite seeing these bullish signals and if we do not at least see a close at the end of the week above those previous all-time highs set earlier in the year, I would be concerned about a false breakout this week. Failure to close above 2110 in the S&P on Friday night should make the bulls more concerned about the potential for a sell-off into the end of the month.
The E-mini Nasdaq has also been in more of a holding pattern over the last 2-3 months. The index was late to the party, not reaching a high for the year until late April, when we hit 4555.50. This is not a new all-time high for this market, as this was set back in 2000 at 4884, just before the crash triggered by the bursting of the dot-com bubble. We have spent the last two weeks edging higher again after holding support from the 100-day moving average (the blue line below) at the beginning of May, as every bull hopes that we can at least re-test those late April highs at 4555.50. If the bull run is to continue into the summer months, when we will of course need to see a sustained break above this level, we can then edge towards the all-time high at 4884.
The surprising results of the UK election triggered a very strong rally in the British pound, but this was not matched by a move higher in the FTSE 100 index. In fact, looking at the chart below, there is no indication of any significant news event occurring so far this month. It has been a very dull period for this index, as we traded mostly sideways for the past month or so, only dipping briefly at election time to test the 100-day moving average (blue line). This support held perfectly, just as it did for the Nasdaq index at around the same time.
Of course, the longer-term trend is bullish and there is no indication of a reversal of that trend at the moment, but it’s not possible to say how long we could continue to trend sideways. A break above the all-time high of 7085.5 for the FTSE 100 futures contract is required to re-energise bulls, but it is not until we see a break above six-month trendline resistance at 7100/7120 before I would be more confident of a sustained rally.
I will end with a look at the DAX index, which was doing very well right from the beginning of this year, seeing a gain of over 3000 points or over 30% in just the first 3½ months. The DAX futures hit an all-time high of 12,429.5 on 10 April and with little warning wiped out 40% of the year’s gains within just four weeks. Clearly this has been a very volatile ride but, like the markets above, we have managed to hold above the 100-day moving average support (blue line) so far throughout May.
There is an indication of a base being formed in the DAX and this should be confirmed with a sustained move back above 11,700. This would indicate that we have just experienced a healthy correction in the bull trend and that bulls have been re-energised. We could then go on to target 12,000 and late-April highs of 12,100. Above there is little in the way of a re-test of those all-time highs at 12,429.5.
The generally bullish picture that I have painted for the stock markets would change quite dramatically if we were to see a sustained break below those 100-day moving averages (blue lines). I will be watching closely and ready to write a new article on the subject if this were to happen!
Jason Sen – Technical Analyst & Trader
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