Major Indices Breaking Out : Market Remarks

We have been mentioning for the last few days that market is poised for a bounce. We first covered it after the release of Fed minutes when the market took a dive but the bears could not sustain it. Then we elaborated the emerging bullish flag formation after NYSE session close on Monday May 23rd, 2016.

We then mentioned it before Tuesday May 24th 2016, NYSE open based upon the price action of S&P futures and European markets during the European session, which indicated that Tuesday will not be range-bound like Monday. The confirmation of these bullish formation came when S&P jumped up at the NYSE session open. The corresponding move in S&P futures was a breakout to the upside from a bullish flag on intra-day chart.

The Tuesday’s action did not disappoint the buildup. All major indices closed up strong and broke out of their respective consolidation pattern to the upside. This bodes quite well for a rally – at least for a while. Resistance levels from the 2015 and 106 high still loom ahead that may dampen the rally.

Here are the daily charts of major US indices. All are breaking out of bullish flags. There is more to these chart formations. Apart from breaking out of flag, S&P 500 and Dow Jones Industrial Averages are forming a double-bottom pattern and are near the intermediate top between the two bottoms. A break above would be even more bullish sign.

Smaller-cap and volatile NASDAQ Composite and Russell 2000 declined to lower levels in February than S&P 500 and Dow Jones. Russell’s decline was more pronounced. These two have more to catch up. NASDAQ retraced 38.2% of the rally from February lows to April highs. A break April high will bring in play ABCD pattern, in which the CD leg could equal AB leg in points.

The retracement for Russell 2000 is slightly less than 38.2% of the February-April rally, but it has broken out of bullish flag more convincingly than other.

Dow Jones Transportation Average’s price action is weakest of all major indices. It is still within the flag. After breaking an uptrend line in mid-December 2015, it fell the most but found a bottom in mid-January before other indices. It also made top before others too. In fact it reached the same high level twice – once in March and then in April – in the process forming a double top. It tested the intermediate low between the two tops, thus forming a horizontal channel. Then it fell briefly below the lower limit of the channel. The current short rally since May 13th has put it in a precariously just above that limit. If Transport fall below the channel then it may put rallies in other indices in jeopardy. If, on the other hand, Transport get away from the lower limit convincingly then it may provide more steam to other indices.

Another North-American index, Toronto’s S&P/TSX Composite, is also breaking out of a consolidation. S&P/TSX formed a higher low in February and has been making higher high and higher lows since then. The current consolidation pattern is at resistance formed by the October 2015 high.

Many of the global indices are also making bullish formations. Here are German DAX and Euro STOXX 600. DAX is breaking out of down-sloping flag and has been making higher highs and higher lows since making a low on February 11th.

Broader STOXX 600 is breaking out of a consolidation that resembles the consolidation pattern of S&P/TSX, though at lower level.

Finally here are two market indices from Latin America. Brazilian Bovespa is will within down-sloping flag. It is forming higher highs and higher lows since January 2016 low. The flag is not complete so the up-trend is still in danger of reversing.

Mexican Bolsa IPC Index made 2016 lows in January but then it briefly topped the 2015 high in March. Since then it has slowly drifted down in a consolidation pattern. The index has not broken out of this pattern yet.