Major Indices Face Moving-Average, Fibonacci Resistance – Money-Market Funds Hold Key

Major US equity indices are facing moving-average as well as Fibonacci resistance. The path of least resistance is down near term, with decent support not too far away. For this to hold, money-market funds hold the key.

Since peaking at 60.8 in August last year, the ISM manufacturing index shed 6.5 points in four months before printing 54.3 in December. January was up 2.3 points month-over-month. The August reading was the highest since hitting 61.4 in May 2004. It is hard to sustain above 60. Several times in the past, the index has tended to peak at high-50s/low-60s, before coming under sustained pressure. Hence, it is too soon to say if December’s was a durable bottom. The economic cycle is getting long in the tooth. The recovery is on the verge of completing a decade. Great Recession ended in June 2009.

Historically, US stocks, in general, tend to move in tandem with manufacturing. Chart 1 plots the year-over-year change in the Nasdaq 100 index with the ISM manufacturing index. Most recently, the red bars began to drop in January last year. The ISM index hit 60.7 in February (last year). Should the green line weaken in months/quarters to come – probable – the Nasdaq 100 should follow.

The index currently sits at an interesting juncture.

Early October last year, the Nasdaq 100 peaked intraday at 7700.56. By Christmas Eve, it had collapsed 23.4 percent. From that low through last Wednesday, it then rallied 19.3 percent.

Importantly, a 61.8-percent retracement of the October-December decline rests at 7011. Last Wednesday’s high was 7034.94. Fibonacci followers pay close attention to this retracement and is often a spot where resistance tends to be stiff. Last week’s high also tested the 200-day moving average – unsuccessfully.

During the October drawdown, the Nasdaq 100 (6913.33) also fell out of an ascending channel (Chart 2). Last week’s high was rejected at the underside of that broken channel. Concurrently, since the late-December low, the index pretty much traded within a sharply rising channel. A breakdown can accelerate selling. The 50-day lies at 6632.17. Daily conditions, in particular, are deeply overbought. The index has now rallied for seven straight weeks, but last week produced a candle with a long wick.

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Disclaimer: This article is not intended to be, nor shall it be construed as, investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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