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Oversold Rally Fading?

After a strong rally to start the New Year (2020) the stock market has experienced rising volatility as well as short-term technical weakness as evidenced by the recent daily reversals on 1/24/20 (negative outside day) and 1/27/20 (gap down). The question then becomes whether the 1/27/20 low is a major low or a temporary low. Over the next few days/weeks we will have a clearer picture of the next directional trends in key US stock indexes. In the meantime, enclosed are very short-term technical views on key US stock indexes including S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), and NASDAQ Composite Index (COMPQ).


SPX short-term technical outlook:

The 12/3/19 to 1/22/20 SPX rally has been impressive (+8.71%). Although higher prices are likely in 2020, an overbought condition coupled with the recent Dec 2019 uptrend breakdown below 3,303 (1/24/20) warns of a near-term SPX peak. A potential head/shoulders (h/s) top has also developed over the past month. The left shoulders are represented by the late-Dec 2019 and early-Jan 2020 highs (3,248-3,258). The right shoulders appear to be developing into the recent 2-day rally near 3,293.5 (1/29/20). Neckline support is at 3,212-3,324.5. Since the height of the technical base is 103.27 a convincing violation of 3,212-3,234.5 confirms the h/s distribution top and renders next downside targets to 3,204-3,206 coinciding with the 50% retracement from Dec 2019 rally and 50-day ma, and below this to 3,131.23-3,172.5 corresponding to the h/s top breakdown target and the pivotal 61.8% retracement. On the upside, SPX needs to clear above 3,333.18-3,337.77 or 1/22/20 and 1/24/20 highs to signal the resumption of the primary uptrend.


INDU short-term technical outlook:


Although the 12/3/19 to 1/17/20 rally is less than SPX rally, the INDU has gained 2,048.49 gains or +7.50%. A potential head/shoulders top is also developing. The head is 29,374 (1/17/20 high), left shoulders/right shoulders are 28,873-29,009 (1/2/20 and 1/10/20 highs) and 28,944 (1/29/20). Neckline support is 28,376-28,440. Since the height of technical base is 997 a breakdown below 28,376 warns of a decline to 28,106 (61.8% retracement from Dec 2019 to Jan 2020 rally), and below this to 27,379 (h/s top breakdown target and the 12/3/19 reaction low). To negate the h/s top INDU needs to clear above initial resistance at 28,873-29,009 or the left/right shoulders, and above 29,289-29,313 (1/17/20 and 1/24/20 highs).


COMPQ short-term technical outlook:


The Technology rally is very important as this remains a leadership area and any sustained weakness here warns of a broader market decline. COMPQ has rallied sharply from 12/3/19 to 1/24/20 or +1,004 points. The +11.90% gains have created an overbought condition prompting the recent correction. Although the selling in COMPQ has subsided near 9,088.04 (1/27/20) or just above its 38.2% retracement (9,063) from the Dec 2019-Jan 2020 rally it may be too early to confirm a bottom. Why? A negative outside day (1/24/20) coupled with an uptrend channel/gap down breakdown on 1/27/20 required technical work to repair the near-term technical damages incurred on the downturn. COMPQ would need to surpass key initial resistance at 9,332 (extension of recent channel breakdown) as well as secondary resistance at 9,439.29-9,454.13 (top of 1/24/20 negative outside day and 1/22/20 highs) to confirm the 1/27/20 low as a key bottom and the resumption of the primary uptrend. On the other hand, violation of 9,065-9,088 warns of the next decline to 8,909-8,944 (50% retracement, 50-day ma, and 12/30/19 and 1/6/20 lows), and below this to 8,823 (61.8% retracement). A breakdown below 8,824 would result in a deeper correction as COMPQ retests the 12/3/19 reaction low of 8,435.40.



Source: Courtesy of StockCharts.com


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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