Are stocks ready for a bigger reversal?

How far we can go on stocks? What psychological barriers and round levels are still about to be broken? Trend is telling us that many. Common sense is more cautious. In general, our scenario for the next two years is a much bigger correction or maybe even a bear market. Recession? Why not, name it as you like but there are high chances that 2017 or 2018 we will end negatively.

Having said that, let us take a look on the current situation now in the April 2017. Both major indexes: SP500 and German Dax are having bearish corrections. In both cases, mid-term up trendlines were broken. Normally that should trigger a sell signal but on the bubble markets (yes, we do have that) situation tends to be different. In this environment, every single dip is being used to buy more with better prices. Does not matter if the price broke supports or important moving averages, traders had only one button on the keyboard: BUY.

Ok, trendlines were broken but what else? Not much. Price in both cases is locked inside the trend continuation patterns (bullish). Dax in a flag (black lines) and SP500 in a wedge (blue lines). Both anticipate an upswing. What is more, we are still above important long-term supports. 2323 (orange) on SP500 and 11900 (yellow) on DAX. As long as we stay above those two, the global sentiment on stocks stays positive. Bearish breakout here can be a trigger for a deeper downswing which we are generally expecting. So there is one thing left now – patience but that is a virtue of every successful trader.

Tomasz Wisniewski

Chief Analyst – Alpari Research & Analysis Limited

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