US stock markets recover August mini-crash losses
In the middle of August, China devalued its currency triggering a one-week mini-crash in stock markets. The E-mini S&P 500 collapsed in this five-day period from 2103 down to 1831, almost 300 points or 15%. It appeared that finally investors had woken up to the fact that there was a real risk of a prolonged slowdown in the global economy. It was clear that China could be leading the slowdown and markets spent September digesting this information.
However what has surprised many, myself included, is not only the fact that we have recovered almost all of those losses now, but the speed at which this has happened. In just five weeks the E-mini S&P has roared back from a September low of 1861 to a peak as I write at 2094. The W-shaped recovery is only about half a percent away from the August highs at 2104/2107.
Many investors had been looking for a long-awaited correction throughout 2015, and they certainly got it. I personally had to realise that the bulls were back in control once we broke back above the neckline of the six-month head and shoulders pattern and 100-day moving average in the 2030/2035 area.
As the market now looks likely to end the month well above the 200-day moving average at 2057, it looks like the large short positions continue to be squeezed out of the market. If we make it through those August highs we are likely to target the June/July highs at 2126/2127 before the all-time high set in May of this year at 2134.
The E-mini Dow Jones is actually performing slightly better in so far as we are way past the point where this market experienced its five-day mini-crash. That peak was at 17,535 but we are now trading well above the August high of 17,658. As I write we are trading up to 17,769 as bulls continue to squeeze out the short positions in this low-volume recovery.
Despite continuing evidence of a slowdown in the global economy and severely overbought conditions in the stock markets, it seems pointless to bet against the bull trend. Again we turned positive once the index broke through the trendline joining the April and July lows, which also coincided with the 100-day moving average, at 17,210/17,220.
Although none of this makes any sense to me, you can’t argue with the market. The trend is your friend and until we get a sell signal the trend is most definitely positive. We have been suggesting our subscribers remain long for the last 500 points of the rally and will continue to do so until the price action suggests otherwise.
Even more positive again has been the bounce back in the E-mini Nasdaq 100. This index rocketed through the September high of 4451 on 22 December and has never looked back. Already we are testing this year’s high seen in July at 4686. If we see a weekly/monthly close tonight above this level, it is likely to signal further gains into November, ensuring continued pain for short positions in this rally, which has taken us from a low just one month ago of 4040, producing a rise of over 640 points.
European investors haven’t been quite so lucky. Although the DAX has experienced a significant recovery from a September low of 9300, beating September highs at 10,524, we are now struggling to beat Fibonacci resistance around the 10,850/880 area. This represents only a 50% recovery of the whole market collapse from April this year, down to the double bottom low at 9300. Much less impressive than the performance of the US stock markets.
However there is no clear sell signal here and we are holding above the 100-day moving average. This could eventually allow further gains up to the 11,050/11,080 resistance area. Just above here we meet the area from which the DAX collapsed on that Chinese devaluation in mid-August at 11,114.
It’s a similar picture for the FTSE recovery, which has also only managed to regain 50% of the losses seen from a peak in May. This market is battling with a 100-day moving average at around the 6400 area, so this is the main challenge for bulls as we move into November.
Technical Analyst & Trader
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