US stock markets approach all-time highs in big sideways pattern
There is endless discussion of course on the future direction of US stock markets. We have faced the threat of a slowing economy in China, continued weakness in the European economy despite extensive measures to increase liquidity, and higher US interest rates. Despite a couple of shocks in the summer and autumn/winter over the past 12 months, markets have recovered quickly after each correction of about 10% to 15%. US stock markets simply refuse to go down.
As you can see in the E-mini S&P weekly chart below, we have held a range on the downside from just above 1800 at the all-time high of 2134, with highs over the last six months in the 2105/2110 area. I can see nothing in the shape of a topping pattern that would normally warn of anything heavier than a 10% to 15% correction from this point. In fact, despite the low volumes on this recent four-month recovery, the market looks remarkably stable and, in the past two months, held nicely above the 100-week moving average (the blue line).
The daily chart below shows the summer volatility, the steep sell-off that followed in January and also the steep recovery since February. This low-volume recovery has taken us back up towards the November/December highs at 2105/2110. Of course from here up to the all-time high at 2134 we should start to struggle, especially as we enter overbought conditions.
Bearing in mind all the negative news that has been circulating for the last 12 months, the market has held up remarkably well, and all the negative calls by the increasing amount of bears have been proved wrong. I myself had felt quite negative up until about two months ago and had perceived that big risks were to the downside. Now I would not be at all surprised to see the market break above the all-time high followed by a very slow, boring grind higher throughout the summer once we get the next interest rate rise out of the way. (Perhaps that’s the kiss of death right there for the stock market!)
It would appear that there are just too many negative views and too many bears holding short positions for this market to see any significant moves to the downside at this stage. We have been in what I would call a continuation pattern for at least the last 12 months, if not longer. If this is a continuation pattern, it means that the previous bull trend will eventually resume. If we start to break above 2134 and see a couple of daily closes above here, followed by a weekly close above, a short-squeeze panic through the summer months could follow.
Obviously failure to break the important resistance band of 2010/2124 keeps us in this sideways trading pattern for the foreseeable future. The obvious first downside target is in the 2033/2027 area. This is simply the 100-week moving average and the first 23.6% Fibonacci support.
In the daily chart above you can see a trendline drawn from the beginning of April, joining up the early May lows. This potential head and shoulders pattern was heavily discussed through social media and I mentioned it myself in a recent article. I did warn that a head and shoulders pattern is never confirmed until the neckline is broken. The break has to be confirmed with at least one daily close below it, preferably two.
As is often the case, the head and shoulders pattern is very easily spotted and now, with retail traders posting comments every second of every day on social media, it’s not long before anyone who has any interest in financial markets is made aware of this potential negative pattern. Inexperienced retail traders sell in anticipation of a break below the neckline, which never happens and the result is the big 80-point short squeeze that we’ve seen over the last two weeks from 2022 up to 2103 as I write.
We are now however faced with another potential small topping pattern. If we fail to break 2105 a small double top pattern could provide us with a target of 1995/1990. This would be a correction of only just over 5% from where we are trading now and a potential short-term buying opportunity if we fall this far.
Technical Analyst & Trader
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