Nearing technical breakouts

Headline news have been one of the primary drivers of the financial markets this past year. The trade wars and macro-economic uncertainties have weighed on the mindsets of investors forcing many to the sidelines. Despite the above conditions, key US stock markets including S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), NASDAQ Composite Index (COMPQ) and S&P 600 Small Cap Index (SML) have been resilient. Expanding market breadth (advance/decline and % of stocks trading above its 200-day moving average) and favorable price momentum (MACD indicator) hint of impending technical breakouts as we move into the seasonal strength period from November to December. Attached below are technical commentaries on the above four key US indexes.

S&P 500 Index (SPX) – Despite a trading range over the past 7-months between 2,722-2,729 and 3,022-3,028 the market breadth continues to expand further and the number of SPX stocks trading above its 200-day ma is healthy. Technically speaking, this suggests SPX has been very resilient considering the geopolitical turmoil and macro-economic uncertainties. In fact, over the past 3 months there have been increasing volatility including 7 gap ups, 3 gap downs and 2 negative outside days. This has resulted in a tight trading range between 2,822-2,856 and 3,022-3,028. However, the constructive technical base in recent months now hints of an imminent breakout. Trading above 3,022-3,028 suggests +205.86 points or SPX targets to 3,095 (top of its broadening pattern) and above this to 3,228-3,234 and then to 3,320. On the downside, initial support moves up to 2,946-2,963 (10/11/19 gap up and 50-day ma). Key secondary support also rises to 2,856-2,868 (10/3/19 lows and 200-day ma). Medium-term support remains at 2,768/2,722-2,729 (38.2% retracement from its Dec 2018 to Jul 2019 rally).

Dow Jones Industrial Average (INDU) – The dominant trend this year has been the broadening pattern. This pattern can be bullish (continuation of primary uptrend) or bearish (reversal of its uptrend) depending on the outcome of the formation. The top of the pattern is rising near 28,010 (key resistance) and the bottom is at 23,784 (key support). On a medium-term basis, an uptrend channel has developed between 25,880 and 28,010. On a near-term basis, a 3-4-month triangle between 25,880 and 27,231. The triangle is converging toward its apex signaling a major move over the short-term. A convincing move above 27,231-27,307 confirms triangle breakout and suggests +2,718-points or targets to 28,010 (top of the broadening and uptrend channel) and 29,949-30,025 (triangle and broadening pattern breakout projection). Key initial trading support moves up to 26,539-26,694 (50-day ma and the 11/11/19 gap up). Key secondary support is 25,880-26,075 (bottom of uptrend channel and 200-day ma). The 38.2% retracement (25,227) from the Dec 2018 to Jul 2019 and the Aug 2019 lows (25,340) is key medium-term support. Failure to maintain this support warns of a retest of its 50% retracement (24,556) and below this to 23,784-23,885 (61.8% retracement and bottom of broadening pattern).

NASDAQ Composite Index (COMPQ) – On an intermediate-term basis, NASDAQ Composite continues with its unresolved broadening pattern. The top of the broadening pattern is 8,498 (key resistance) and the bottom is 7,221 (key support). However, over the past 3 months a triangle pattern has developed between 7,663-7,731 and 8,184-8,244. The height of the 3-month technical base is 676.74-points. A convincing move above 8,184-8,244 renders targets to 8,498 (top of broadening pattern), 8,861-8,921 (triangle breakout projection) and then to 9,382 (broadening breakout forecast). Initial trading support moves up 7,983-8,047 (50-day ma and 10/11/19 gap up). Secondary support is 7,802/7,700-7,731 (200-day ma/bottom of the triangle). The 38.2% retracement (7,518.5) from Dec 2018 to July 2019 offers additional support. The 50% retracement (7,265) and the bottom of the broadening pattern at 7,221 is key medium-term support.

S&P 600 Small Cap Index (SML) – SML appears to be mixed as two major technical patterns have developed this year. One is a descending broadening wedge which can transition into a bullish reversal pattern and the second is a smaller broadening top pattern which is interpreted as a near-term bearish condition. Market breadth and price momentum technical indicators are constructive. The recent rally above its key moving averages (50-day ma at 936 and the 200-day ma at 941) hint of another major test of resistance along the top of its descending broadening wedge and its all-time highs at 984-994. A breakout here suggests +91.53-points or technical targets to 1,006 (top of the broadening top pattern), 1,075-1,092 (broadening breakout target). The 50-day/200-day ma at 936/941 is key initial support. Secondary support is also visible at 923-929 (10/11/19 gap up) and 915-917 (Aug 2019 uptrend and 38.2% retracement from Dec 2018 to Feb 2019 rally). Violation here opens the door for a decline to its Aug 2019 lows (892-896) and below this to its 61.8% retracement (871) as well as the bottom of its broadening top (865).