We have mentioned in early June that the US stock markets are likely to weaken (here). In the past 2-3 weeks, we have seen those markets dropping to the uptrend line support at 11800 for DJIA & 2600 for the Nasdaq Composite index. Can this support prevail?
For DJIA, the uptrend line support coincides with the 40-week SMA line (the equivalent of the 200-day SMA line) at 11750. This strong support was severely tested over the past 3 days & it is still holding. The last time, DJIA broke an uptrend line in April 2010, it dropped about 1000 points and then traded between 9700 & 10700 for 4 months. So, if the 11750-11800 support failed this time, DJIA could drop 1000 points into the trading band of 10750-11500 & trade therein for the next few months.
Chart 1: DJIA's weekly chart as at June 16, 2011 (Source: Stockcharts)
Nasdaq Composite index is holding onto its uptrend line support at 2600. It broke its 40-week SMA line (equivalent to the 200-day SMA line) at 2662. The last time, Nasdaq broke an uptrend line in April 2010, it loat about 200 points and then traded between 2100 & 2300 for 4 months. So, if the 2600 support failed this time, Nasdaq could drop 200 points into the trading band of 2340-2540 & trade therein for the next few months.
Chart 2: Nasdaq's weekly chart as at June 16, 2011 (Source: Stockcharts)
Some technical analysts are pretty bullish on the markets. They believe the uptrend support will hold and this could be a buying opportunity. They opined that this is a correction & not a bear market (here). On the side of fundamental analysis, we have Rober Shiller who thinks that stocks & real estate are over-valued (here) while Credit Suisse thinks that it's time to buy equities again (here).
My gut feeling is that we are going to see a repeat of April 2010, i.e. a breakdown of the uptrend line, to be followed by a 10%-drop from there & range-bound trading for the next few months (as outloned above).
3 comments:
Bro,
Correct me if I am wrong
I thought 200 EMA/ SMA is a solid level to determine whether that is a bear /bull trend.
A lot of fundamental analysis also believe on 200 MA.
Will u sell the fkli to hedge your portfolio?
According to Dow Theory, one of the condition to determine whether bull or bear is 250 SMA
Hi Ivan & limchohooi,
It is not as simple as that. Just take a look at DJIA overlaid with 50, 100 & 200-day SMA lines (link below).
http://finance.yahoo.com/echarts?s=^DJI+Interactive#symbol=^dji;range=19980731,20110617;compare=;indicator=sma%2850,100,200%29+volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=on;source=;
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