Where next for stock markets in 2016?
It has been a brutal start to the year for investors, with the E-mini S&P collapsing from 2075 on 30 December to a low so far today at 1894. A loss of 182 points or over 8.75% in less than two weeks of trading.
We can now see a potential left shoulder in a large head and shoulders topping pattern if we look at the weekly chart below.
The two red circles show the potential left and right shoulders. The right shoulder appears to be forming after the bounce back from the mini-crash in August of last year, which peaked below the all-time high of 2134. The 100-week moving average (the blue line) acted as an excellent support level from the second half of October up until the end of December but we have plunged back below.
Last week’s plunge is seeing prices head back down towards three important monthly low points:
- the September low at 1861
- the August low at 1831
- the October 2014 low at 1813
The neckline to the head and shoulders at around 1840 is now the most important level to watch. A break and close below the August low at 1831 could therefore signal a break of the head and shoulders neckline. This would act as a completion of the large longer-term topping pattern and would signal the start of a bear market.
The first target level is 1790/1780 and a break below here would add significant pressure, then targeting 1735/1730. Further downside targets for the year lie at 1640/1630 and we could even make it as far as quite good support at 1575.
Just bear in mind that the important head and shoulders topping pattern is only completed when the neckline is broken. The neckline is an important support area and, if we see a bounce from here, this would signal a continuation of the one-year sideways trending pattern.
The DAX futures contract also shows a potential head and shoulders topping pattern as you can see in the weekly chart below.
Again the circles indicate a potential left and right shoulder formation. The neckline is also the lower trendline to a one-year triangle pattern. You can see that last week’s sell-off hit that important trendline and it held perfectly.
A bounce from here will be a huge relief to bulls and could take us back up to the 100-week moving average at 10,300. A break of last week’s low at 9723, however, is going to keep the bears in control as we target 9580 and then very important support at the August/September double bottom lows at 9320/9300.
The E-mini Nasdaq chart is more encouraging for investors.
As you can see in the weekly chart above, the E-mini Nasdaq is approaching three important levels of support:
- 23.6% Fibonacci at 4209
- 100-week moving average at 4190
- One-year trendline at 4180
The 4209/4180 area is therefore absolutely crucial for this week. Bulls absolutely must do everything possible to defend this level if they are to contain the damage. Failure to do so risks a re-test of January and September lows at 4041.
The E-mini Dow Jones weekly chart is more in line with the E-mini S&P & DAX futures. Again a potential head and shoulders pattern is forming, as indicated by the red circles in the weekly chart below. You can see that we are already in quite a negative trend having broken two important uptrend lines in Q3 2015.
Again the 100-week moving average (the blue line) has been doing an excellent job of support and resistance and you can see we have plunged back below it, targeting the even more important 200-week moving average (the red line) at 15,720.
The neckline, which should also act as support, is quite a distance away and is close to 15,000, a big round number that should have a significant psychological impact.
Technical Analyst & Trader
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