Technical Analysis: U.S Market – The sell-off has started after price fails to hold above key levels across all asset class June 29, 2020 227

  • The U.S market witness another round of selling, with the strongest wave of Friday 26th of June 2020.
  • The FAANG stocks turned negative after a series of winning streaks. Facebook is leading the sell-down.
  • Should the market continue its selling on Monday 28th June, the bearish sentiment will continue into July.
  • Dow has been lagging behind the Nasdaq Composite and the S&P 500 Index, indicating that a large amount of smart money is not in the market
  • Our report on 15th June indicates that the wave theory has been in line with the market course.

 

*Smart money refers to capital controlled by institutional investor like the big banks, central banks and large funds.

 

After the index reached the 78.6% Fibonacci retracement of wave W (highlighted in purple), the sell-down last week is moving closer to a potential wave 3 ahead should the immediate support at 24,681 is broken.

Potential immediate rebound will be at 21,430-20,744 region (highlighted in teal). 

Future movement of the zig-zag wave of the double three still holds unless the resistance zone at 28,889 and 29,548 is invalidated.

 

*Double three is a complex corrective wave which consists of Flat, Any Three and Zig-Zag

 

The smart money flow index indicates that prices had a major divergence point since February 2020 during the sell down which saw Dow plunged more than 10,000 points within 3 weeks. Despite sharp inflow in February 2020, the Dow continued to fall. This means the smart money is not enough to support the market. Next, the market began to recover after Dow hit rock bottom at the 18,000 region. The smart money did break the resistance at 3.50%. However, Dow still significantly lacks behind the market with the momentum corrective with flat lines.

The Divergence 2 shows for the first time that Dow continues to rise with the smart money inflow reluctantly flowing out below 10.00. Which in turn forms a divergence. Whenever a divergence happens, it signifies a mismatch and the Dow soon find itself unable to sustain and prices begin to fall.

Crucial support level at -0.36% indicates a break will see further stronger outflow which may see the Dow falling further.

 

*The value on the y-axis is describing the % percentage rate of change.

 

The momentum on Dow’s daily chart played out according to our report on 15th June when prices reverse at 26,586 after filling the gap. The continuous rejection of the 200-day period moving average indicates a weakness in the bullish momentum.

The ultimate test is when prices remain within the support zone at 24,681-25,015. Should it break below the support zone, prices could travel to 23,000 psychological support to form wave 3. However, should 23,000 be strongly broken, there is a likelihood of Wave 3 terminating at the support zone at 21,430-20,744.

 

Unlike the Dow Jones Industrial Average, the S&P 500 is still far from the support zone, with the index hovering above it by 29 points and still closing above the 3,000 psychological level along with the 200-day period moving average. However, the momentum and price action suggest that the S&P 500 should be testing and breaking the support zone at 2,980-2,934.

 

Potential mid-term rebound is at 2,330-2,522

 

Nasdaq Composite rallied and break new high after the index bounced off from the support at 9,500 region. Despite the strong rally, Nasdaq swiftly reversed after hitting the psychological resistance at 10,250, forming a graveyard doji. The index subsequently moved below 10,000 and the index may be testing the key resistance turned support zone at 9,308-9,500.

Should the index find itself supported at 9,308-9,500, the possibility of an expanding/running flat is still possible as it may gather enough momentum to test the high at 10,595, which is the extension level 123.6% of wave A.

 

Facebook had a false breakout when the stock made a final attempt to rally after a bullish engulfing candle after the hammer on 16th June which we mention on 15th June report. Facebook strong sell-down on Friday sees the prices close below the support zone at US$224.20. As such, we believe that Facebook will test the next support level at US$199.22.

 

Microsoft sell-off came 2 days later after the stock failed to cross above US$204.00. There was a divergence based on our recent report on 22nd June but the  price rallied nonetheless. The rally was nothing but a false breakout with the Relative Strength index (RSI) showing a bearish divergence still. Furthermore, the failure to reach 127.2% and an evening star formation below it strengthen the selling further.

With prices closing back below the US$200.00 psychological level, the stock is looking to test the immediate support level at US$190.65-US$188.00.

 

In our recent report on 22nd June, the report indicated that Alibaba is on the 3-3-5 regular flat after a strong bearish candle rejecting 90% of wave A. Despite the price reversing higher, the stock failed to close above US$230.00 and it actually forms a tweezer top. The bearish sell-down thereafter closed up the gap. It shows that the gap is an exhaustion gap. In other words, the bullish momentum is seen to be weakening.

Subsequent sell-down sees price return below the psychological support at US$220.00 and the stock may attempt to break the lower bound of the rising wedge.

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Profile photo of Chua Wei Ren

Chua Wei Ren
Technical Analyst
Phillip Securities Research Pte Ltd

Wei Ren specialises in Technical Analysis and has 9 years of experience in studying classic technical price action. He also study and research extensively on Elliott wave theory, Dow Theory and Supply & Demand strategies as he believes that history plays an important role in how the market is reflected in the future.

He graduated with a Bachelor of Economics and Finance from University of Murdoch.

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