Friday, June 17, 2011

US Markets at a Crossroads

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:

Ivan said...

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?

limchohooi said...

According to Dow Theory, one of the condition to determine whether bull or bear is 250 SMA

Alex Lu said...

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=;