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Review of the trades from Monday 19th January
19th January 2015
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Articles
Negative Patterns Developing in US Stock Markets
By Jason Sen
22/01/15
One of my favourite contracts to trade is the E-mini S&P, so it’s the stock market I am probably most focused on. I have been watching potential negative patterns develop over the last six weeks and I have been warning my clients about this since the beginning of January. I’m looking at a potential head and shoulders reversal pattern on the daily chart below. You can see the left shoulder formed around the beginning of December with the head at the end of December. Within the first two weeks of January we may have completed a right shoulder, but confirmation only comes with a break below the neck line. This is where it gets slightly confusing because at the end of last week, we did test that neck line and close below it on 15 January. However on 16 January, although we continued lower we survived a test of the December low at 1968. It appears that at this stage we had become oversold enough to trigger a bounce. However this bounce is not as strong as many we have seen in the past and I am increasingly convinced that the market is turning and starting to develop a negative trend. As I write we are holding quite strong resistance around the 2025 area and only above here will relieve some short-term downward pressure. We could then go on to test the highs of what I believe is the right shoulder in the 2050/2060 area. Below the 100 day moving average at 2016 would certainly be more negative but the head & shoulders neck line at 1996 is key. If we see a day or two closing below here I would start to feel more nervous and would worry that losses could accelerate to the downside. Of course a break below the current January low and December low at 1970/1968 would add pressure and a break below the 200 day moving average at 1963 is likely to trigger stops from some of the bigger funds. Let’s just have a quick look at some of the other US stock markets to see if there is evidence to back up the theory of a more negative trend for the first quarter of this year. The Emini Dow Jones chart below shows a very similar picture with a clear head and shoulders pattern developing. Here the head and shoulders neck line is around the same area as the 100 day moving average at 17,275. Again a day or two closing below here will add pressure, bearing in mind we have not seen a daily close below these points yet. A break below the January low at 17,125 should quickly target the December low at 17,039. Below here could accelerate losses at least as far as the 200 day moving average at 16,972. Again, a break below here is likely to trigger stops on longer-term positions, which will add to the negativity. It is also worth looking at the NASDAQ and Russell charts. The daily chart of the Russell futures contract also has a very clear head and shoulders pattern and the key levels to watch on the downside are firstly the neck line at 1160 then a band of support from the 100 and 200 day moving averages at 1152/1148. If anything, the NASDAQ chart is more worrying than those above, with a clear indication of a short term bear trend having already started. You can see that the peak at the end of December is lower than the peak at the beginning of December. The peak in mid-January is lower again, and last week’s low broke the December low. A series of lower highs and a series of lower lows tells us that a negative trend is developing. The only question is how long will this trend last?
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