'Santa rally' hopes shatter on S&P 500 selloff
Bulls' hopes for a year-end rally in the S&P 500 were already on shaky ground following continued trade war noise surrounding the Huawei CFO arrest, but Friday's sell-off has likely put them to rest.
Summary: An SHS pattern that began to emerge in the DAX in early September is now coming into much sharper focus. What's more, several technical indicators suggest that things could get worse from here.
Some weeks ago it became apparent that an S-H-S pattern in the DAX seemed to be unfolding:
Medium term, next couple of months, weekly chart – as of 11.09.2018:
Taking a closer look at the weekly chart an interesting scenario could unfold. Not only has the DAX broken bearishly out of a triangle-like pattern but the index is close to confirming a Shoulder-Head-Shoulder (SHS) pattern – not a straightforward SHS as it has two heads but nonetheless an SHS pattern. (The head was actually a double top which was concluded in Q1 2018 when dipping below 12.000). Another little caveat is that the neckline is sloping downwards. An SHS pattern with a downwards sloping neckline usually performs worse than an upwards sloping neckline, i.e. if breaking the neckline the drop could be of less magnitude – it has already moved most of the way AND if dropping down to test the neckline the 200-week moving average will act as a support which could be around the 11.500 level.
Update as of 11.10.2018:
That’s more or less where we are now. As can be seen from the weekly chart there is not much strong support before around 10.800. So it can get much worse. The 10.800 would be the minimum target for the S-H-S formation.
However, in the short term we could see some rebound. It is not unusual to see pullbacks where the market retests the neckline from beneath before the next likely sell-off. RSI and MACD are bearish with no divergence so all indicators are pointing lower. Bollinger® bands are expanding, indicating the initial stage of a (medium-term bearish) trend.
Daily – GER30
In the short term we could see a rebound and at the time of writing, GER30 is rebounding somewhat from the falling neckline. However, I do not believe the rebound will turn in to a bullish trend any time soon but a rebound towards the resistance at around 11.865 could be seen over the next few days. 11.700 also offer some resistance.
Bollinger® bands are expanding indicating we are in the initial stage of a trend pointing to lower levels. RSI has been indicating a bear trend since July as it has not been able to break above the 60 threshold and GER30 has indeed been in a bear trend since with lower highs and lower lows.
RSI is not showing divergence so lower levels on DAX/GER30 are on the cards.