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S&P 500/Dow Jones Technical Highlights:

  • S&P 500 recaptured broken Feb ’16 t-line, 200-day
  • Dow Jones retracement similar to early-year price action
  • Next move could be sharp decline even if worst over

With global stocks falling sharply, see how recent events fit into our outlook for the remainder of the year in the Q4 Global HEquities Forecast.

The V-bottom rally has led to the S&P 500 not even hesitating upon a retest of the 200-day and February 2016 trend-line. In fact, the gap the other day came above the 200 and price sprinted through the trend-line.

But does this mean the market can keep on chugging higher? Perhaps the sharp rise off the lows is indicative of a market that wants to make good on favorable seasonality trends and end the year on a positive note. However, while this may be the case, there is still the threat of a sharp pullback first, if not worse. We saw it earlier in the year, could very well see it again.

What would ease this notion is if the market were to consolidate or at least pullback somewhat gradually as opposed to nosedive. This would indicate that market participants are willing to step up relatively quickly, providing support for another leg higher towards the record highs. For now, though, the expectation is for more volatility and if not we’ll take note and go from there.

See how traders are reacting to the increased volatility on the IG Client Sentiment page.

S&P 500 Daily Chart (can a pullback hold recently recaptured levels?)

S&P 500 daily chart, can pullback hold recaptured levels?

Dow Jones retracement similar to early-year price action

The Dow has retraced in very similar fashion as to it did in February. Back then it took back about 70% of the decline in 11 days, and so far we have seen the Dow take back about the same amount of losses in 9 days. Certainly not looking for the market to act exactly as it did then, but the fierce rally is at risk of a sharp decline.

The first level of support to watch clocks in just above 25800, which if held wouldn’t constitute a ‘fierce’ decline. However, as said earlier if the market can keep from retracing too deeply too fast here, then it would be a good sign that the market wants to continue its recent run. A sharp break and drop below 25800 will have lower levels, including the slope from April in focus..

Dow Daily Chart (Watch 25800 on weakness)

Dow Jones dail chart, watch 25800 on weakness

You can join me every Wednesday at 10 GMT for live analysis on equity indices and commodities, and for the remaining roster of live events, check out the webinar calendar.

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---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX