S&P 500, Dow Jones Industrial Average, Russell 2000 and the New York Stock Exchange index:
For the past few weeks we have been discussing a key pattern formation which took place at key levels and resulted in a double bottom. This key pattern formation took place on several key U.S. equity indices. Most notable of them is the New York Stock Exchange index with the symbol NYA. The New York Stock Exchange index (NYA) formed a symmetric move which was not only equal in time and but also in price. When the price meets the time, the pattern is complete.
This pattern formation is illustrated on the below weekly chart of the New York Stock Exchange index (NYA) as the black dashed lines. We can see that the move is symmetric in price and also in time. It took about 14 weeks from the May 2015 high to form a low on 24 August 2015. This is labeled as the segment AB. When we project this from the point C, where a rally attempt faltered in the past, we get a projection to about 8930. And this is precisely what the market did. Retested this level, found support and rallied for the past four weeks. Now the question on every ones’ mind is that, is this rally going to continue or the market move lower? We take a look at the several charts of the U.S. markets and discuss the key pattern formations and the key level we need to be watching very carefully for the next week, which is going to be a very key week for the markets.
New York Stock Exchange index weekly chart:
Taking a look at the above chart, we can see that the price rallied strong last week. We also note that the price is now getting into a zone which we like to call the danger zone. It lies between the 61.8% and 78.6% Fibonacci retracement levels. Also this is an area where the previous rally attempt (albeit corrective) will equal the current rally. This is illustrated by the blue line on the above chart.
This is the zone which needs to be watched very carefully next week. It is likely that the price will rally in the early part of the week to test the upper band, however, if we close negative for the week it would be negative for the market, if we do close above the 78.6% retracement level, it would be a first indication that perhaps the low has been seen and the market could rally to make new all time highs.
We like to take a look at the S&P 500 by analysing the futures market and use the ES front month contract.
What is very interesting to see is that like the New York Stock Exchange index, the ES also formed the AB = CD pattern as illustrated on the chart below. These two key U.S. indices forming a key pattern formation was a strong indication that perhaps a reversal to the prevailing trend was in the making and the markets rallied for several weeks.
ES Weekly chart:
The ES (front month contract) is also right in the danger zone. Getting above the 2016 level at the 78.6% Fibonacci retracement is bullish for the index. Getting above this sets up target to the all time highs and perhaps beyond. However, if we begin to close below this level and particularly on the weekly time scale, this will be regarded as a bearish signal and perhaps the rally is faltering. Next week is the key one to watch for.
S&P 500 cash weekly chart:
Dow Jones Industrial Average:
Like the S&P 500 and the New York Stock Exchange index, Dow Jones Industrial Average also formed a double bottom and has been rallying for the past several weeks. It is now approaching key resistance levels which need to be watched carefully next week. Getting above the 17400 level is a bullish sign. If we begin to close lower on weekly basis, then the rally is faltering. Getting above the 17400 could indicate perhaps new all time highs to come. Next week is a key one to watch for.
This key index representing the mid cap companies often get over looked when compared to the U.S. broad indices. However, this has been a key index to watch in this bull market. This index had been lagging badly in terms of price and sold off and it is only later that the broader averages followed suit.
Russell 2000 weekly chart:
This index also formed an AB = CD pattern has been rallying for the past several weeks. Last week was a strong close for the Russell 2000 index. Now it is entering the danger zone. The level of 1100 should be watched very carefully next week as a key level where a reversal could take place.
The U.S. markets have been much stronger since the major indices formed double bottom patterns and have been rallying for several weeks. S&P 500 closed above 1975 which was a key level as well. As long as the index remains above this key level, the chances for higher prices increase. What is important is that for next week, all the major indices are aligning up at the key levels and it will be a key week for the U.S. averages and levels we have mentioned above must be watched carefully.
As always, we wish you good luck and prosperous trading!