Dow Jones Industrial Average future, Weekly 

For the first time since the year 2011 the Dow Jones Industrial index futures are now moving below the 50 week moving average for more than two consecutive weeks. This speaks of a changed market psychology and is in line with my predictions in May. Also, China’s decision to devalue Yuan twice hit the market sentiment from two directions. First of all, it is a sign that China’s economy needs artificial support from a lower exchange rate and secondly now the products imported into China are more expensive and therefore less competitive. For German companies for instance China is an important export market. As a result Dax is trading almost 2.5% in the red today. Also, this move has been interpreted a sign of desperation on behalf of Chinese officials.

On May 7^th I tweeted on MSCI World Index saying that the bull market for stocks is over. I pointed out that MSCI World etf charts (weekly and monthly) indicate that the markets have entered to a volatile topping phase. This phase typically takes place after a long move higher and leads to a severe correction or a period of bear market. Monthly chart showed an increase in volatility and a bearish shooting star candle with the next candle moving well below the shooting star low. The weekly chart showed how this MSCI World index tracking etf had moved outside the up trending regression channel, a clear sign of increased volatility and weakness.

Since my tweet in May, the technical picture in many of the stock indices has continued to degrade. Dow Jones Industrial Average (DJIA) has moved sideways and has been weaker than both Nasdaq and S&P 500 indices. Just lately DJIA created a lower high that eventually led to index breaking below the 50 week moving average. After such a long move higher this is a bearish indication. Many other indices have also given clear bearish warning signs and suggest that for long term investors it is the time to gradually move money from long stock positions to inverse ETFs and into trading the short side opportunities with CFDs. Let’s take a look at what the other indices are signalling on the state of the global stock markets.

S&P 500, Weekly

On July 27th I wrote about S&P 500: Long term picture has turned more bearish with the index making a lower high. The supports however are still in place and should attract buyers at levels not far from the current price action. This will probably lead to rally but due to the overall weakness in different sectors I expect that this rally will lead to another lower high and more sideways ranging before the market can become directional again.

This is indeed what happened market rallied the next day and created yet another lower high. S&P 500 index future (ES) is again at those same levels and is trading close to both the weekly lower Bollinger bands and 50 week moving average. However, the next clear support level is a little lower at 2034.25. After a weak rally from this support area and a lower high in daily chart it might well be that this support will not hold but support is still support until it is penetrated. The next support is at 1973.75. Over the past week money has been flowing away from cyclical stocks into the safe haven of utilities. Utilities are up by over 2.5% in relation to S&P 500 index while Financial stocks are only up by 0.72% on the same basis. Market participants have clearly turned into more risk averse direction although there are no signs of strong risk aversion yet as financial stocks are holding up rather well.

Nasdaq 100 index future, Weekly

Nasdaq has been relatively strong when compared to other US indices. In mid June index was able to push into new highs but this move was quickly faded and Nasdaq fell back below the previous high of 4551. If a market breaks into new highs but cannot then sustain the new levels, it generally means that market participants did not see the move as a sign of strength but rather as an opportunity for profit taking. Index has since fallen almost down to a potential support area between 4344 and  4448. The bottom end of the range coincides with the lower 1.5 stdv Bollinger band while the 50 week moving average is not far away from the level at 4314. I expect that this down move in Nasdaq will reverse inside this support area but then there will be an important resistance are between 4551 and 4638.

MSCI World Index, Weekly

June 12th I wrote about MSCI World index etf: Weekly chart reveals that the index etf has made a lower high and has since then moved back to the support at 32.73, which once more bounced IQQW higher. This is very bearish and the peak of the lower high is a clear sell area should the market still manage to rally up there.

We have since seen exactly this happening: price rallied to the previous peak and turned lower right there. This global index tracker etf has been moving sideways in what very much looks like a topping formation after a huge run higher. For three months global stock markets have been in a topping mode as I expected would happen. Unless something extraordinary happens these topping formations tend to lead to sizeable corrections that usually bring the markets down at least the width of the formation. In the case of this MSCI World index etf it would mean almost a 10% correction below the current levels and 16% correction from the highs printed in April. This correction would be more severe in more smaller and volatile stock markets such as South-East Asia or Scandinavia or a high beta markets such as German Dax. Even though two lower highs indicate that the MSCI World etf will eventually break lower it is now close to a supporting level and we need to see the support broken before such a move can take place. The next significant support level is at 30.08.

Conclusion

The most important stock indices globally are showing signs of weakness just as expected. Such behaviour after a long and extended move higher in these markets suggests that institutions are not buying but rather distributing their long positions in stocks. This is a time to gradually move from long term investing to trading stock CFDs as there will be money making opportunities during both the sideways move (topping formation) and eventually in the following correction. Once the correction is over and stocks are at levels that are attractive from both a valuation point of view and technically we can start considering them again. Currently many of the indices are near the lower end of their topping formations. This increases the chances of markets rallying from here and it therefore makes sense to look for rallies to previous peaks or other major resistance levels in order to time the selling (and in case of traders, short entries) correctly.

Janne Muta

Chief Market Analyst

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