Introduction
After last month’s heavy stock market falls, the markets have bounced back as people have seen this as a good opportunity to pick up some cheap stocks.
As a result, the price of both the Dow Jones and S&P 500 has moved back upwards towards the 200-day exponential moving average, and above it in the case of the Dow Jones.
However even though we have seen a small rally of sorts, the markets are delicately poised right now and could yet go a lot lower.
Looking at the daily price charts of both indexes, I think today could well be a decisive day for the markets, and could potentially determine the future direction in the coming weeks. Let me explain why.
Pin Bar and Inside Bars
Last Friday we had a significant pin bar on both of these markets whereby the price moved a lot higher during the trading session but ultimately fell back downwards and closed close to where it opened.
This is important because it indicates that there wasn’t the momentum to drive it higher (and stay higher), and indicates that there is still a lot of uncertainty in the markets.
To confirm this point, there was an inside bar yesterday where the price traded within the range of this pin bar on both the Dow Jones and the S&P 500, which once again highlights a degree of uncertainty.
Finally, it is worth noting that the 20, 50, 100 and 200-period exponential moving averages have all converged in recent days and are now trading very close to each other, which often occurs before a significant breakout.
Future Price Direction
At this point in time it is absolutely impossible to predict which way the markets are going to go. However I think this is going to be an important trading session today because if the price of the Dow Jones or the S&P 500 closes above or below the range of last Friday’s pin bar, it could be the start of a massive breakout.
If this occurs, we could see the markets move hundreds of points upwards or downwards in either direction.
It could be the start of a new bullish recovery, which could continue right through until after Christmas because this is nearly always a good period for the stock markets, or alternatively it could be a continuation of last month’s falls and there may not even be any kind of Christmas rally this year.
For purely selfish reasons, I would prefer an upward breakout because this would have a positive knock-on effect on my UK stock portfolio, but I still have some cash on the sidelines ready and waiting to pick up some bargains if the markets move a lot lower.
Either way, it should be interesting to watch the price action today, and see if the price can close significantly outside of the range of this pin bar on both markets.
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