Implications of the Weekly Negative Outside Weeks?
The majority of traders and investors turn to the daily charts to identify entry and exit levels. The weekly charts comprising of the weekly highs and lows are overlooked or ignored. Most of the time, you do not need the weekly charts for trading and investment decisions.
However, the second half of September is one of the weakest seasonality periods of the year. Also, options expiration during this week can lead to an increase in market volatility. In prior blogs, we mentioned another inflection is near.
Popular markets such as the Dow Jones Industrial Average (INDU), the Nasdaq Composite Index (COMPQ), and the Nasdaq 100 Index (NDX) have recorded some technical weakness as evidenced by negative outside weeks on the weekly charts. The negative outside weeks warn of another battle between the bulls (buyers) and the bears (sellers).
Enclosed below are the technical commentaries on INDU and COMPQ.
Dow Jones Industrial Average (INDU – 34,577.57)
Outside weeks are traditional reversal patterns. More often than not, they tend to be reliable in predicting near-to-medium trend reversals. In the past two years, INDU has recorded four (4) positive weeks (3/23/20, 1/4/21, 7/6/21, and 7/19/21) and four (4) negative outside weeks (6/8/20, 8/31/20, 2/22/21, and 8/26/21).
The negative outside weeks have led to modest corrections in INDU of 5% to 10% and spanning from 1-4 weeks. The negative outside week in 8/26/21 is now 4-weeks old and may be nearing a critical stage. The violation of the 10-wk ma (35,054) has ignited additional selling. INDU is revisiting the pivotal 30-wk ma (34,168).
So, the question then becomes - will INDU soon find support, ending the recent 3.06% correction and signaling the start of the next INDU rally?
Or will INDU violate its 30-wk ma at 34,168, triggering a deeper correction toward the May/Jun 2021 reaction lows at 33,300-33,500?
Nasdaq Composite Index (COMPQ – 15,037.76)
The broad-based COMPQ index has recorded more positive outside weeks (7 times) than negative outside weeks (4 times) over the past 1-plus year. However, the onset of a negative outside week in 9/7/21 warns of a near-to-medium term reversal.
Although a negative outside week is a reversal pattern, the 1/25/21 negative outside week does not necessarily lead to a follow-through correction. It depends on a host of factors, including the primary trend, overbought/oversold conditions, price momentum, and most importantly, its ability to maintain above its 10-wk ma.
For instance, the 1/25/21 negative outside week led to a successful test of the 10-wk ma, resulting in another 3-week COMPQ rally before the next negative outside week pattern on 2/16/21.
However, two other negative outside weeks (8/31/20 and 2/16/21) resulted in deep corrections. On both occasions, the violations of the 10-wk ma triggered declines of -12.88% (8/31/20) and -12.54% (2/16/21).
The recent negative outside week pattern on 9/7/21 has triggered another pullback toward the 10-wk ma (14,895.65). Violation of the pivotal moving average warns of a deeper correction to the 8/16/21 weekly low (14,423) and possibly the 30-wk ma (14,139).
On the other hand, a successful test of the 10-wk ma can also stabilize the recent selling pressure, signaling the next COMPQ rally to the 9/7/21 weekly all-time high of 15,503.44, and above this, the resumption of the primary uptrend.