Over 40 years’ heritage
185,800 clients worldwide
Over 15,000 markets

Is this a market top or a buying opportunity?

In a month where indices have seen significant selling, we find ourselves at key crossroads that will determine whether we are set for a more long lasting sell-off or simply a continuation of the bullish trend seen over recent years.

Wall Street
Source: Bloomberg

European and US stock markets have been seeing substantial weakness over recent days, feeding off the back of a similar period of weakness earlier in the month. These moves have brought about a greater potential for a period of downside for markets. With a number of critical support levels being hit today, there are a number of signals that will tell us more about whether this could come to fruition.

FTSE

The FTSE has suffered at the hands of a strengthening pound, with the index coming off the back of a third consecutive week of losses. Looking at the stochastic oscillator we have seen the signal line cross below 80 for the fifth time in 13 months.

The past four occasions heralded an average subsequent sell-off of 10%. Even stripping out the 20% drop in May 2016, the past three occasions brought an average of 6.4% downside.

FTSE weekly chart

The four-hour chart shows the sharp rally we have seen this morning, with the price bouncing into trendline resistance. The fact that this has happened from 7381 is not a surprise, for this level is absolutely crucial in determining where we go from here.

Ultimately, a break below 7381 would be a significant signal of impending selling, and it is only once we see such a break that a bearish view will come into play. On the flipside, as long as we remain above 7381, there is a chance of a recovery, with a break back through 7382 providing a strong bullish signal.

FTSE four-hour chart

DAX

Looking at the DAX, we have also seen significant weakness over the past week. However, while we have seen the price drop below notable support levels, the index remains above the key 12,490 support threshold. Interestingly, today has seen the price fall below the bottom bound of the Bollinger band for the first time in 2017. Twice this has formed a significant support level, and if today’s price action is anything to go by, there is a good chance we could see the same occur once more.

With that in mind, we need to see the price break below the 12,490 support level to provide a strong bearish signal.

DAX chart

Nasdaq

The Nasdaq has been at the forefront of recent weakness, with this week seeing the second sharp sell-off of the month. However, once again we see the Bollinger band come into play, with today’s low coming into that indicator once more.

Crucially, we have seen the low of the day found at the 5633 level. The fact that we have seen the price break below trendline support is certainly notable. However, given the recent inability to break to a new high, a break below 5633 is the signal required to provide confidence of a more longstanding period of weakness.

Nasdaq chart

S&P 500

The S&P 500 has similarly found itself back at Bollinger support, with the price finding support from this indicator once more. Whilst we have typically seen the price break below this lower band in the past, this is typically fleeting, pointing towards a potential recovery. Adding to that the ascending trendline, there is reason to believe we could begin to turn higher.

To the downside, we are still far from anything too worrying, with 2346 required to be broken for a bearish period to come into play. 

S&P 500 chart

To sum up, there is no doubt that warning signs are beginning to show. However, none of these four markets have provided a sell signal on the wider picture.

That being said, we have clear thresholds for the FTSE (7381), DAX (12,490) and Nasdaq (5633) that must be watched. Only until we have seen at least two of these three levels broken, there is reason to believe that this could be an interesting buying area.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.