The Technical View: US Stock Market on Shaky Ground

dominoes-21252_640Do not get excited. Yesterday’s initial market rally fizzled, as sellers were able to push back prices and the market finished very close to their opening levels. Even worse, this is the third day in a row that the US Equity Market closed below resistance level (neckline) and the second consecutive day in which it closed below the 200-day moving average (DMA).

Volatility has also increased something that is common prior to a trend reversal. As the reversal gains momentum, volatility tends to sharply increase as traders act to take advantage of the change in direction.

But let’s start from the beginning. The US Equity Market had been in a rising trend since the beginning of this year but by the second quarter it started to show signs of weakness as more and more equities experienced a “correction” (a 10% drop from their highs). At the same time momentum was also falling, indicating weakness in trend direction. This resulted in a choppy market since April, and sellers took the upper hand by the end of June. Buyers were unable to follow through and what used to be support became resistance.


It remains to be seen how all this develops but in the short-term investors should be very cautious. Long term investors however can sleep peacefully at night. We reiterate that there is an integral relationship between time frames where short-term timeframes (daily charts) move intermediate-term timeframes (weekly charts) which eventually move long-term timeframes (monthly charts). Daily, weekly and monthly charts do not all rollover in tandem. They never have. There is precedence in the order of actions.

The weekly chart below shows that the uptrend since 2011 is still intact and the price has two major support levels (S1:2040, S2: 2000) before creating major damage in the trend foundations. The momentum oscillator’s (RSI) negative divergence and break within the bearish momentum area is something to consider but no action is required for the moment.



Going further back and looking at the monthly chart below, it suggests that long-term investors should stay put. In prior crises the 12-month moving average has been a reliable indicator in confirming a change in trend. When a major line of support becomes resistance, it confirms a possible trend change. Currently this is not the case. The only bearish signal we are experiencing at the moment is the MACD cross-over which also happened during the last two bear markets but in our experience, oscillators are supporting tools that merely provide warning signals. The decisive action should always be based on price itself.

chart 3

You may blame Greece or you may blame China but whatever the reason is, it is already reflected in the price. The US Equity Market is on shaky ground but not all investors should worry. Short-term investors and traders are definitely feeling the summer heat while long-term investors should stay put and enjoy their vacation.


Costas Pierides CFTe, MSTA

Market Technician

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