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).