With the stock market just a little below all time highs, there are lots of fears that emerge as to whether it may crash. Or will it continue in an upward trajectory? Let us look at the facts and see what is in stall for September 2017.
In order to gauge what the US stock market is likely to do, we need to look at a few things:
While there are a thousand different things that can point to the health of the market, we will be looking primarily at the charts and do a trend analysis. There are of course many great indicators such as market breadth, put/call ratio, % of stocks above or below the 200 MA etc etc, but since price is king, and trend is the key, I tend to focus my attention to what the charts are trying to tell me rather than focusing too much on internals.
Don't get me wrong, the internals can often point to early warnings but I suppose it's just best to use them as supporting evidences rather than the main analysis that a trader should do. That is to look at the trend of the charts and try to figure if the uptrend is still intact. While we may never be able to catch the exact top, its good enough to catch the majority of the trend.
To know what the market is likely to do, we need to look at the Dow Jones Industrial Average, The S&P 500 Index and Nasdaq Composite Index. The reason is because they are the gauge of the US economy. 75% of stocks in US follow the direction of these 3 major indexes.
For a mid term outlook, we look at the daily chart. For longer term outlook we look at the weekly chart of these 3 major indexes.
The month of August has not been very good to the stock market for the past 5 years. Following history, the market experienced volatility this August 2017. Volatility is a trader's friend because it enables the trader to go in and out of stocks in a short period of time. So far, looking at the daily chart of the Dow Jones above, we can see how the index is finding support at price. The rising 50 MA also acted as a powerful psychological support that kept the Dow Jones from dropping.
Currently, the index is trying to form some kind of triangle. We can already draw a downtrendline from the recent price action of the Dow. The last time the Dow broke above a downtrendline, it resulted in a nice slow drift higher. At this moment there are two focal points that we need to look at. Whether Dow can continue to surge higher and break above the downtrendline or drop below the support line and 50 MA. A break above the downtrendline will tell us that the bulls are firmly taking control and winning the battle.
It is important to note that the Dow Jones is still in a nice daily uptrend. Therefore, the dips were actually good places to buy stocks at a cheaper price. So far, no weaknesses in the daily uptrend can be seen in the Dow.
Looking at the S&P 500 index, we can see that the index is still in a nice uptrend. The trend is a bit weaker compared to the Dow since it has shown a tendency to break below the 50 MA. Breaking below the rising 50 MA is alright as long as the index quickly snaps back up. It has done this many times in the past proving that the daily uptrend in the S&P 500 index is still strong and intact. Recently, it challenged the 50 MA and went below it and just went back up again.
I will not worry too much if the S&P 500 stays above the 50 MA the majority of the time. The 50 MA is extremely important because so many people are looking at it. Notice also that the S&P 500 is trying to break above a downtrendline. If you look carefully, the S&P 500 might be forming a mini reverse head and shoulders. I would not read too much into it unless it breaks above the downtrendline decisively.
The Nasdaq Composite shown above is still in a nice daily uptrend. One big difference between it and the other 2 major index is that it has already broken above a downtrendline. That is very very good. The 6200 area will be a support area to watch for traders. As long as the index stays above 6200 and continue to have more follow through to the breaking of the downtrendline, we can expect more gains for the Nasdaq and most tech stocks.
Let us now turn our attention to the big picture. I like to use the weekly charts to analyze the long term outlook for stocks. Weekly chart have less noise and when the stock market has a sharp correction it always bring calmness to the mind of a trader by looking at the weekly charts. Many times, you can often pick up stocks cheaper when the indexes reach a support area in the weekly charts.
As you can see from the chart above, the weekly trend of the Dow is very very good. The strong uptrend is still intact. It has not even drop below the rising weekly 20 MA at all since the November 2016 breakout. This is an indication of a strong bull market. There are two very important support areas which the Dow has formed by trading sideways for a period of time. I have drawn the 2 boxes above and these 2 areas will act as a very good support for the index in the event of a drop.
With that in mind, any drop in the Dow will be deemed as a correction rather than a big crash because of the strong layer of support you can see on the chart.
The weekly chart of the S&P 500 also tells the same story. It is in a strong weekly uptrend. It has not even drop below the rising 20 MA at all and recently it has found support at the 20 MA. Two strong support areas are also present in the index. Which is why I'm not too worried of any major crashes at the moment. Any drop will most likely find support at these 2 support areas.
The Nasdaq Composite Index is also in a strong weekly uptrend. Rising steadily and step by step, it paints a picture that the bull market is real and there is no bubble yet. Compared to the tech bubble in 2000, the current rise in Nasdaq is a gradual rise rather than a parabolic rise that will eventually result in a big crash.
So, here is the conclusion for the major indexes:
Therefore, the focus for traders at this moment is still to play the dips and the breakouts.
An analysis of the market would not be complete without looking at the small caps and mid caps.
Looking at the IWM, the support area of IWM is still intact. The weekly stochasctics is very oversold and that could hint to a gain in the near future. As long as the support area holds, I do no think we have much to worry about the state of the market.
The midcaps also look about the same to the small caps. MDY is also bouncing off support. The long term weekly support is crucial and as long as they stay above the support area, the market is in no danger of a big crash yet. The stochastics in MDY is also quite oversold.
Looking at the seasonality for the past 5 years, August and September has traditionally not been very conducive months for stocks. Which also explains why the market experienced volatility in August.
The seasonality chart above is for the Dow Jones. notice how for the past 5 years that August and September were not good months for the Dow. For August, the Dow has only closed higher 40% of the time with and average loss of 1.6%. September is even worse with Dow closing higher only 25% of the time. However, the average performance for the month is 0%. Meaning, it kind of traded sideways. This is something that we can expect this year as well.
Do note that seasonality is just a guide. It is not a definite answer to how a market or stock may perform for that month.
If you look at the months of October, November and December, the past 5 years were very conducive to stocks. Therefore, if the market continues to trade sideways and not drop in September, there is a possibility of a nice bull run into the end of the year.
The seasonality chart of the S&P 500 is pretty much the same with the Dow. Nasdaq has performed slightly better than the other indexes in Aug and September. Looking at the seasonality charts of the 3 indexes, we can see that November is a very good month to long stocks.
With that in mind, let us prepare ourselves for a possible nice rally towards the end of the year. Having said that, the charts will always be our primary guide. Which is why it is important to do a daily and weekly analysis of the major indexes. Studying the stock market requires some work. This saying is very true "The stock market is one of the hardest place to make easy money".
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