The global market sell off has largely wiped out the past 18 months gains on the US indices. The straw that broke the camels back was the FED proceeding to raise interest rates by 0.25% to a target range of 2.25%-2.5%. There was a silver lining in that the Fed’s chairman, Jerome Powell indicated that its likely there will be only two rate increases in 2019 instead of the previously forecast three. Powell also stated that members thought “this move was appropriate for what is a very healthy economy”. However, the market evidently wanted a more dovish approach and subsequently tanked.
After managing a close just above February’s correction low on Wednesday, the Dow Jones Industrial Average finally lost it’s footing, dropping below several supporting trend lines a day later. First to go was the 100 Moving Average (MA) on the weekly chart, followed by a break out of the Dow’s current trend channel. This was swiftly followed by a dip below February’s correction low, and finally a crash through a trend line formed from the two lows in 2016 (Blue line). As I write, the Dow is attempting to regain its position above this last trend line at around 23,000.
Although now oversold on the daily chart, the weekly Relative Strength Index (RSI) still has some scope for further downside. In order to avoid a retest of the 22,650 low becoming inevitable, the Dow could do with a positive last session of the week today. In the event that level of support is lost, expect a move to the 22,000 zone, with the 20% drop from highs marker just below at 21,500. While a 10% drop from all-time highs is considered a correction, a 20% drop is generally regarded as confirmation of a bear market. If negative sentiment cannot be reversed, the 200 MA will get a visit.
The 200 MA provided support for the 2016 market correction. If it doesn’t come to the rescue again, a weekly trend support line is currently waiting at 19,500. With all the US indices having enjoyed such steep upward runs, there is little, established support from periods of consolidation. You have to look all the way down to 17,000 area for potential sturdy support.
The S&P 500 index is looking even more bruised than the Dow but it has also bounced reasonably well off yesterday’s lows. Should support at 2,441 be retested and give way there’s a sweet spot of potential support from multiple trend lines bang on where the index would be hitting confirmed-bear-market territory. This level, approximately 2,350, is the meeting place for horizontal support, the 200 MA, and a weekly trend support line that runs all the way back to 2008. As the S&P attempts a regain of 2,500, the 100 MA and the bottom of the previous upward trend channel seem a long way off. As you would expect it to be, the overall picture is similar to the Dow in that there was little in the way of consolidation on the way up, so established horizontal support doesn’t come into play until nearer the 2,000-2,100 level.
Across the pond, the FTSE-100 hit 6,630 on Thursday, a 16% fall from all-time highs of 7,900. While the index hasn’t shown any sign of a convincing bounce, it has already found an area of considerable support. The current price is hovering above a weekly trend line based on closing price lows that intersects with a downward trend underlining the last three dips. If the FTSE-100 continues to fall below current 6,620 support, 6,500 may offer a safety net, but a further drop below 6,320 will confirm the index is in bear market territory. There are however a couple of trend lines of support on the weekly chart that may add additional strength.
A close back above one or more of these broken support lines would be a step in the right direction for any kind of recovery on these indices. Of course with optimism very low, any positive moves could be sold in to, leading to a risk of further downside. One thing is for sure, the market appears to have been on Santa’s naughty list this year – let’s hope it behaves itself in 2019.