S&P 500; US Indexes Fundamental Daily Forecast – Dow Showing Early Signs of Weakness; Plenty of Room to Downside
The major U.S. equity indexes are trading lower early Monday. There was no follow-through to the upside after Wednesday’s gains. Dow futures are trading back below 22,000 which suggests yesterday’s rise above this level means nothing to investors and only served as a reason for CNBC to break out the party hats.
Technically, the September E-mini Dow Jones Industrial Average futures contract is already showing signs of a shift in momentum with market crossing to the weak side of an uptrending support angle that had been guiding the market higher for the last seven days. This is a serious development because it suggests the strong possibility of a 200 point correction today.
Contributing to the early weakness are weaker indexes in Asia. This may be a reaction to the news that service sector growth in China rose more slowly compared to the month before. According to Caixin services, the services PMI figure for July came in at 51.5, slightly below June 51.6 reading. The figure for July also matched April’s reading, which was the lowest seen since May 2016.
The early selling pressure in Asia may be spreading to Europe where markets opened lower on Thursday. Besides concerns over valuations, investors are also moving to the sidelines ahead of the Bank of England’s Monetary Policy Committee interest rate decision. Additionally, investors are focusing on Germany’s Ifo report.
On Thursday, investors will be watching a series of fresh economic reports from the U.S. because of their potential impact on the Fed’s next interest rate decision. Anything that supports a weakening economy or lowers the chances for a Fed rate hike, could pressure the U.S. Dollar.
Today’s reports include Challenger Job Cuts, Weekly Unemployment Claims, Final Services PMI, ISM Non-Manufacturing PMI and Factory Orders. The most important report is the ISM Non-Manufacturing PMI. It is expected to come in at 56.9, below the previous 57.4 read.
Forecast
The stock market is a little tricky. The Dow reached a new all-time high on Wednesday, but the lackluster movement in the S&P 500 and NASDAQ Composite This suggests a divergence is taking place. This is potentially bearish.
The problem is we aren’t sure if a weaker Dow will take the other indexes lower, or if it will it lead to another round of sector rotation.
I think that it’s significant that the September E-mini Dow Jones Industrial Average futures contract is showing early signs over weakness. This may not be indicating an imminent change in trend, but it could be a sign that the selling is greater than the buying at current price levels.
The key Gann angle to watch is at 21956. A sustained move over this angle will indicate that buyers have returned. But a sustained move under this angle will signal that selling pressure is increasing. If the selling is strong enough, we could see an acceleration to the downside with the next potential target angle 21700.
Based on the current chart pattern and the weakness in Asia and Europe, I think investors have to be prepared for a steep sell-off today. The chart pattern suggests the Dow could drop as much as 256 if we get a perfect storm of bearish signals.
This article was originally posted on FX Empire
