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Pause before the Next Rally?

The stock market pulled back for the third consecutive days. However, the 3-day market pause appears to be another consolidation. If the backing and filling process is successful, then this can set the stage for the next sustainable rally. On the other hand, failure to maintain above the key initial support warns of a deeper correction.


So, is this or is this not a consolidation phase?


In technical circles, consolidation is a term that describes the period where the stock or security is neither continuing nor reversing a larger price trend. Consolidation is typically a stop-gap timeframe where the stock or the security trades within a limited price range until another pattern emerges. Understanding whether this is a consolidation or something else involves assessing the key support and resistance levels, trading volume, and the duration of the narrowed trading range.


Once consolidation is determined, the breakouts or breakdowns above or below the upper and lower trading range levels become increasingly important. These breakouts or breakdowns are often associated with an expansion in trading volume that leads to sharp gains or losses in a relatively short period. It is common for prior support levels to become new resistance zones after a bearish breakout and the previous resistance levels to turn into key supports after a bullish breakout.


In the past few weeks, key market indexes such as S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), and NASDAQ Composite Index (COMPQ) broke out of prior key resistances. The neckline resistance breakouts during 10/08/20 and 10/09/20 confirmed head and shoulders bottom patterns. The subsequent pullbacks over the past 3-days have become increasingly important as the above indexes are now testing their prior resistance zones, which are now the key initial supports. The ability to maintain these supports would signal the next rally. However, failure to maintain these supports can also warn of deeper corrections over the near-term.


Attached below are the key technical levels corresponding to the current consolidations:


S&P 500 Index (SPX – 3,483.34)

Prior neckline resistance (10/8 and 10/9/20 breakout) turns into initial support at 3,431.5-3,455.


Dow Jones Industrial Average (INDU – 28,494.20)


Prior neckline resistance (10/8/20 breakout) is now initial support at 27,338-27,648. The 10/15/20 low at 28,181.54 is close enough to the neckline resistance to define this as pivotal near-term support.


NASDAQ Composite Index (COMPQ – 11,713.87)


Prior neckline breakout (10/9/20 breakout) represents initial support at 11,392-11,429. The 10/15/20 low at 11,559.10 also offers support.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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