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Is The Stock Market Ready For A Reversal Lower?

Mar. 22, 2021 1:56 PM ETS&P 500 Index (SPX), COMP, DAX:INDCOMP.IND
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  • Stock markets around the world are reaching new extension high but they are in technical patterns indicating a big squeeze.
  • US 10 Year yield is rising.
  • NASDAQ was unable to breach new high while DJIA and SPX did.
People silhouettes on American stock market index S P 500 - SPX.
Photo by Funtap/iStock via Getty Images

Stock bulls are feeling safe as all the market dips are well supported by the buyers. Is this a reason to be 100% sure in the upside continuation of DJIA beyond 33000 for example? Let us take a look at the combined technical analysis look of the leading world stock markets, which are sending us squeezed price action pattern readings.

First- MSCI world Index is struggling inside the Pitchfork channel in which was violently swung back after February 2020 turmoil and is reaching again 8400 points within the rising wedge pattern (you will see this long-term squeezed price action pattern in most of the Indices mentioned today). It is also reaching 5 waves top which can be at 8400 or 8500 but it is within reach. This could be the first and most evident example of the overall market top. Correction here will open the road for a test of support rising wedge line 8000.

MSCI WorldSecond-10 Year US treasury bonds which were directly correlated with US stock market rise have lost upside momentum, and yields are on the rise, which will be a signal of a faster rate hike and possible tightening of the monetary policy even sooner than widely anticipated and greatly priced in the stock markets.

A break below the steep top trend line and for the first time below 200 SMA on the weekly chart is calling a larger correction to 137 at least where the Fibonacci 38.2% of the last swing higher lies as been seen on the monthly chart.

T-Bonds 10 Year monthly

T-Bonds 10 Year weekly

Mentioned above is the main reason to be concerned in buying the dips, either in futures Indices or stocks. 

Similarly, we can see in the leading US stock index S&P500. It has reached a top 4000in two steep rising wedges, long-term and medium-term, and has pulled back since to test the downside resistance edge 3900 as we can see on the weekly chart below. This is probably enough for a smart investor not to go buying stocks or SPX futures till at least we see a confirmed break above 4000.

SPX weekly chartIf we move to Europe we will see that DAX has reached steep uptrend line resistance connecting the previous two top formations in 2015 and 2019 marked with vertical lines on the charts below (monthly and weekly).

DAX has in previous cases turned in a heavy correction following these formation tops, and so it can be a case this time where this reversal and possible correction could lead to a downside test of 13500 at least.

DAX monthly chartDAX weekly chartAnd last but not the least, NASDAQ has traditionally led US stock Indicex higher previously, however in the last two weeks, it was unable to reach the top. Furthermore, we had a break below the sharp rising wedge (again a rising wedge, usually a high probability price action bearish pattern) below 13500 and a retest of this broken resistance.

NASDAQ weekly chart

We can see from the observation above, that almost all of the traditionally bearish facts are present in today's stock market. If we are not about to see a huge bearish reversal, because there are some technical levels that should be cleared on the downside, we could see a larger degree correction from these levels. Buying the dip, technically speaking is not recommended here, rather it could be buying the confirmed break above the recent highs if we get there...Stay awake, keep in mind these levels and take some profit if you were buying lower.

Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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