When it rains, it pours. Such is the case with the US markets for the first two weeks of 2008. Many are still in denial of whether a recession is coming or even that they're already in one. They're still pinning their hopes on Bush & Bernanke to bail them out of the quagmire they're in. I can't really talk much about what lead to the current situation based on all the politics involved but I can show you what has happened to see just where we are with the current situation.
Since 2003, we see that the Dow Jones Industrial Average has been trading inside a range with an upward bias. It was able to get out of the range back in September 2006. It dropped in late February 2007 due to what is now known as the China Syndrome; where China dropped 8.8% and everyone else got spooked including the US where DJIA lost 4% for that day. The curious thing about what happened was that when it corrected, it was respecting the trendline of the range that it broke out of. An obvious sign of role reversal. After that scare, DJIA was able to shake that off and go even higher by reaching 14,000 in July 2007. It corrected down to 12455 but was able to reverse itself immediately and reach a new high of 14,225 in Oct 2007. But at this time, it seemed that DJIA had a hard time making higher highs. True enough, after another correction, the Dow attempted to try to reach 14,000 again in December 2007 but was able to reach 13,850 only and then it dropped since then.
If we look at it properly, DJIA started going sideways since May 2007 to create what looks like a head and shoulders reversal formation. With this, the neckline of DJIA was being tested for a while around the 12,700 area and it was finally broken just this past week. Although the downside for the Dow is 11,200, I don't believe that it will drop to that level immediately. In fact, I was expecting that when DJIA goes down, it will retest the trendline of the range; which is now at the 12,350 area. Retest it, it did, but it didn't take long for the Dow to re-enter the trading range. The next base that it will search is 11,709 (the high on May 10, 2006) and 11,926 (the low on March 14, 2007).
What about the Nasdaq & and S&P 500? Let's also look at the other major indices of the US market.
The Nasdaq has long been inside a trading range since 2004. It tried to break away from this range late last year but it just could not sustain the momentum. Since this market is heavy with technology stocks, and the technology stocks are the ones that are being battered too, it was a no brainer that Nasdaq was also going to fall like DJIA. In fact, it's on its way to retest the support of the range, currently at the 2200 area. Unlike the Dow which is still bullish for the long term, Nasdaq has come off its high (5132, back in March 2000). It has retraced from that level down to the 1100 area back in 2002 and has risen since then although it is still generally a sideways movement with an upward bias.
Last is the broad-based index, the S&P 500. The movement of this index is very similar to DJIA as it has also made a new high recently and it has come from an upward channel since 2004. Yet there is still a difference between the two. Like the Nasdaq, the S&P 500 was not successful in maintaining a breakout from the trading range late last year and has returned back inside the range. This is not the only glaring thing about this index, the other thing is that it seems to have formed a head & shoulders reversal pattern too, much like DJIA. But should the S&P 500 follow what is expected, it could fall to a downside target of 1238, clearly breaking the whole channel.
Things definitely don't look good for the US at this point. For the short term, DJIA is bearish with the head & shoulders reversing its earlier trend. But this doesn't mean that it's bearish for the long term. Despite that outlook, as a trader, I go with the flow. Right now, the flow is going down, so it's time to look for shorting positions.