Stock Market Still Above Key Support Levels

By: Donald_W_Dony

Global markets are reacting differently to the ongoing challenges in Europe. But they all have one item in common. They appear to have stalled above key support levels.

The broad-based Dow Jones World Stock Index (Chart 1) is now consolidating above the important 245 support level. This line has held the global index over the past two months.

The concern is that the index is no longer trending up. An advancing market is a series of higher levels. Once an index starts to test and retest a specific price level, then the chances of a downward movement starts to build.

Should this line be broken in May then the probability for a move down to 235 is great. Also as the markets have another expected low coming in late July to early August, if the index does move below 245, then the chances of ongoing weakness over the next three months grows considerably.

The S&P 500, by comparison, is displaying considerably more strength. With over 80% of its holdings still advancing, its trading pattern is more robust. Still the US index is also showing signs of slowing with flat trading between 1360 and 1425 (Chart 2).

The TSX is providing the worst performance with a two month downturn. The commodity driven market has declined over 5.8% since March. The index has still remained above its main support level of 12,000 which it has tested several times since April without breaking (Chart 3).

Bottom line: Indexes are still above key support levels. The ongoing weakness in May continues to be a concern. Should these main support lines be broken this month, then the probability of lower levels grows substantially.

Investment approach: The repeated pullback to key support levels is not a welcomed sight. An ongoing uptrend is a series of higher levels. Once an index is no longer achieving this desired pattern, the probability of increasing weakness starts to build. Though the Dow Jones World Stock Index, the S&P 500 and the TSX, have not broken their main support levels, just the fact that they are no longer advancing, is a reason for concern. The S&P 500 is displaying the best relative performance out of the three. Nevertheless, as world indexes are linked, should global markets start to correct, the S&P 500 will likely follow too.

Investors may want to watch very carefully the indicated key support levels over the next few weeks.

For the uptrend to continue, the Dow Jones World Stock Index needs to trade over 255, the S&P 500 over 1420 and the TSX over 12,450.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2012 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.