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US stock markets could head lower into the end of September

We have seen an excellent recovery through August for US stock markets after the summer correction, which I’m pleased to say I did predict in a couple of articles I wrote for before the summer started. The recovery in the USA was very much stronger than that witnessed in the European markets, which perhaps have been held back a little more by the ongoing trouble in the Ukraine and the resulting sanctions on Russia. However all that could be about to change in the weeks ahead.
I have to admit that I was surprised by the strength of the bounce back which set new highs for the Dow Jones and the S&P 500. The pattern that has developed over the past two to three weeks however looks more negative. Many argue that valuations are very overstretched and there is a lot of speculation out there about a more serious correction. It’s true to say that I have read articles calling for a crash in stock markets. According to my charts I do not yet see a significant move to the downside but I do see a small correction and cannot rule out a retest of the summer lows we saw in the first week of August. The charts below clearly show rounding top patterns in the Dow Jones and the S&P 500.

Daily chart of the Emini Dow Jones above.

Daily chart of the Emini S&P above.
I think these look like reliable enough rounding top patterns for me to alert you to the likelihood of another correction as we head into the autumn. Likely initial targets for a move to the downside are the 200-day moving averages represented by the red lines you see in the charts above. At the moment these are at about 16,772 in the Dow Jones and 1931 in the S&P 500 but are still rising gradually each day. However I certainly would not rule a retest of August lows.
I just want to examine a couple of other US markets to see if they back up my theory of a second correction in this half of the year. Let’s start with the Nasdaq chart below.

This looks like a combination of both a ‘rounding top’ and also a ‘broadening top’. Both obviously signal a potential top in the market – there is a clue in the name! In this case the 200-day moving average currently coincides very closely with the value of the August low at 3845. Worth noting that the Nasdaq had a relatively minor summer correction which was really nothing more than a small blip in the six and a half year bull trend. Right now I see nothing on the horizon more than a small correction again at this stage.
Lastly let’s looks at the small-cap Russell 2000 daily chart.

This is a potentially much larger and more significant topping pattern as it has been building over the course of this year. You can see a double top pattern from the two 2014 peaks set in March and July at the 1213 level. There is also a head and shoulders pattern building here – albeit a rare one with two heads but you can clearly see the two shoulders formed right at the start of the year and again in August and September. A move towards the August lows at 1108 again would not be a surprise but with this chart looking far more negative, a retest of the lower trend line you see in the chart above at 1080 could also be on the cards.
I think if we do see the corrections now as I expect, this will throw up buying opportunities. I do think the big sell is coming eventually but not this year. We will need to see much bigger topping patterns before I start using the ‘C’ word – CRASH!

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