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Are indices set up for another year-end rally?

As we move into Q4, could seasonal historical trends coupled with technical analysis point towards an impending period of strength for the major indices?

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As we move into Q4, there is a feeling that many of the big decision from some of the major central banks have either been made, or postponed, thus providing us with a relatively stable environment for markets to move. With the summer lull out of the way, there is reason to believe we could be setting up for a break higher in some of the main stock markets.

From a seasonality point of view, the chart below highlights the average performance in the FTSE, DAX and S&P 500 on a month-by-month basis. What is stark is all these markets tend to see periods of weakness during the summer months, which often will run up until the final weeks of September. However, it is also notable that on average, the fourth quarter is usually personified by a period of strength for stock markets, which could be the case once more in 2016.

Seasonality graph chart


Looking at the FTSE 100 over the long-term, it is clear we are back into a crucial resistance zone which encompasses the previous all-time highs from 2000, 2007 and 2015. Interestingly, we did see a similar bearish divergence in the stochastic oscillator prior to the past two major crashes and while we did see something similar leading into the 2015 downturn, this has now been negated with the creation of a new high in the stochastic. Momentum is now creating a bullish divergence, rather than a bearish one.

This could point towards a strong period for the FTSE and with the seasonality story kicking in, we could easily see the index push to a new high and onwards. Previous attempts to gain ground at new highs have done very little by means of upside volatility, with the index instead grinding slowly higher and finally selling off sharply. Given the recent pullback, there could be reason to believe this time could be different.

FTSE price chart


The DAX has also taken a turn for the better recently, with the weekly chart below highlighting a significant bullish triangle breakout in August. Crucially despite losses earlier this month, we have seen the upper threshold of that triangle turn from resistance into new support, providing the base for this week’s sharp rally.

Given the break above the crucial 10,532 swing high last month, the stage appears to be set for the index to push higher in a convincing manner. Of these three markets, the DAX has typically experienced the best end of the year on a seasonal basis and the fact we are still 17% away from all-time highs means there is a significant amount of ground to make up. Nevertheless, as long as we do not see a break back into the triangle, we could see a strong period of upside for the DAX.

DAX price chart

S&P 500

The weekly S&P 500 chart highlights the fact that despite some recent gains, we have not actually seen too much in the way of significant deterioration since the early 2016 low. The weakness seen earlier this month has dissipated with a rally from a trendline convergence, pushing the index up towards new all-time highs.

From a wider perspective, we are trading within a rising wedge pattern. While this pattern is typically bearish for the eventual breakout, the wider bullish story could point towards the possibility of a break higher. That being said, with the index close to all-time highs, trading within a typically bearish pattern and the monetary policy path differential, the European markets are arguably more interesting for a Q4 rally.

S&P 500 price chart

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