Selloff or Market Correction? Either Way, Here's What to Do NextSee Overvalued Stocks

US Indices Are Close to a Tipping Point

Published 01/23/2024, 08:32 AM
Updated 03/21/2024, 07:45 AM
NDX
-
US500
-
DJI
-
JP225
-
BTC/USD
-

US indices rewrote all-time closing highs on Monday, with the Dow Jones taking the next round level of 38,000 among them, while a day earlier, the Nasdaq 100 climbed above 17,000 in a powerful 2% gain for the day. Japan's Nikkei 225 reversed to the downside intraday when it was within a hair's breadth of 37,000 - a new 34-year high.
Dow Jones-Daily Chart

With a brief halt in early January, a period of increased greed in equities has persisted since late October. Since the rally has lasted for quite some time, we are looking for and finding signs of potential exhaustion of the upside. And there are plenty of them.

First, the narrative - the reason for the rally, as explained by the media - has changed. Initially, stocks rallied on the change in rate expectations. It was a "the worse the data, the faster the Fed will cut rates" movement. The most dovish sentiment in rate expectations was recorded on 12 January, when the market was pricing in an 80% chance of a rate cut in late March. Ten days later, the market is giving a 44% chance of such a move. Now, robust data is a sign of the strength of final demand.
Nasdaq100-Daily Chart

Second, here and there, waves of profit-taking are evident. S&P 500 futures reached their highest point just after the market opened on Monday before pulling back 0.3%, going into a very narrow trading range, and the Nasdaq 100 went into negative territory late in the day on Monday. Japan's Nikkei lost over 2.5% from peak to bottom after setting a 34-year high.

Notably, Bitcoin and following it, the entire cryptocurrency market is playing out the change in interest rate expectations like a textbook, having recorded a price peak on 11 January and declining with minor stops all along.
S&P 500-Daily Chart

Third, on daily timeframes, new highs in all three key US indices (Dow Jones, Nasdaq 100, S&P 500) are being recorded at the same time as lower highs in the Relative Strength Index. This is an important indication that the upside momentum is wearing off.

A decisive move down in the stock indices at the end of the day on Tuesday or Wednesday could trigger the start of a broader and decisive correction with the potential to take the Dow Jones back to 36,000, the S&P 500 closer to 4,600, and the Nasdaq 100 back to 16,000. And then we'll have to see if this 5–7% correction can change the Fed's tone, making the March decline once again expected.

The FxPro Analyst Team

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.