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Short-term Head and Shoulders Bottoms?

The U.S. stock market declined sharply today as President Trump instructed his team to stop the negotiation on the new federal stimulus. The market reacted negatively with a broad market sell-off as the hope of the stimulus will not come until after the presidential election in November. This action will further disrupt the U.S. rental housing market leaving millions of renters unable to pay their monthly rental payments and many landlords unable to pay their mortgages. At the end of the day, the S&P 500 Index fell 47.63 points or -1.40%, the Dow Jones Industrial Average also declined 375.88 points or -1.34%, and the Nasdaq Composite Index dropped 177.88 points or -1.57%. Despite this new development it is interesting to note that over the past month potential head and shoulders bottoms are developing in major U.S. market indexes. This would imply investors may not be as bearish as it may appear, at least from a near-term technical perspective.


Enclosed is a brief technical summary of the SPX, INDU, and COMPQ.


S&P 500 Index (SPX – 3,360.97)


A potential head/shoulders pattern is developing over the past month. A convincing move above 3,431.5-3,455 (neckline resistance) confirms a breakout and suggests SPX rally to 3,588.11 (9/2/20 all-time high), and above this to 3,677-3,723 (h/s bottom breakout target). However, a negative outside day (10/6/20) warns of a test of key initial support at 3,307-3,333 (9/28/20 gap-up) and 3,310.5-3,323.5 (left/right shoulders). The 9/24/20 low at 3,209.45 is secondary support. Violation of 3,209.45 negates the h/s bottom pattern and warns of -245.69 points or downside to 2,964.


Dow Jones Industrial Average (INDU – 27,772.76)


A neckline breakout above neckline resistance at 28,365 signals the next INDU rally to the all-time high (29,199.30), and above this to 30,193 (1-mo h/s bottom breakout target). However, a negative outside day (10/6/20) warns of a near-term consolidation to the key initial support at 27,338-27,447 (left/right shoulders) and 27,239-27,362 (9/28/20 gap-up). Violation of 26,537 (9/24/20 low) negates the h/s bottom pattern and warns of the next decline of -1,827.80 points to 24,709.


Nasdaq Composite Index (COMPQ – 11,154.60)


A neckline breakout above neckline resistance at 11,392-11,429 suggests the next COMPQ rally toward 11,480 (61.8% retracement from Sep 2020 decline), and above this to 12,074.10 (9/2/20 all-time high), and then 12,301-12,338 (h/s bottom breakout target). A recent negative outside day (10/6/20) and failure to clear neckline resistance warns of a near-term consolidation to the key initial support at 10,728-11,034 (left/right shoulders) and 10,939.5-11,019 (9/28/20 gap-up). Violation of 10,519.5-10,520 (9/21 and 9/24/20 lows) warns of the next decline of -909.20 points to 9,610.


Source: Courtesy of StockCharts.com


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com



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