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Bullish outlook for US equities

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THE Dow Jones Industrial Average (DJIA) had the longest winning streak since September 2017 after rallying eight consecutive days in a row since May 3, 2018. However, the spell was broken last week after the bulls stumbled near the 24,827 immediate resistance area. Despite the minor setback, this is just part of the market dynamics where the uptrend establishes the uptrend structure of higher highs (HH) and higher lows (HL). The near-term outlook in the DJIA remains bullish as the market stayed relatively flat last week.

Since February 2018, the general equity market in the US has been stuck in a correction as the broad-based market sold off hard before finding some support at the 200-day moving average. The DJIA fell as much as 11 per cent over a two-day time window in early February. The subsequent price action continued to show relentless buying at the crucial 200-day moving average, proving that the market is watching that level extremely closely.

The 200-day moving average could be seen as the dividing line between the bulls and the bears. If the DJIA is above the 200-day moving average, the trend remains bullish. However, if the DJIA closes below the 200-day moving average, the market might witness some near-term panic selloff where the immediate trend shifts to the downside.

With the benefit of hindsight, the correction phase since February had tested the 200-day moving average on three separate occasions with the bulls winning the fight each time. Notice how each bullish rejection off the 200-day moving average was confirmed with prominent bullish price action (Hammer) shown by the red arrows in the chart, suggesting the market is defending the 200-day moving average at all cost. Moreover, taking an alternative view also shows a triple bottom bullish pattern forming off the 200-day moving average. With the bullish streak last week, the DJIA has also succeeded in breaking above the 20, 60-day moving average and downtrend line signals further upside as the 200-day moving average base firms up.

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The minor details on how the DJIA has been progressing along with two recent HL are further clues that the uptrend is getting stronger. For instance, using the 23,088 low after the volatile selloff in early February as the reference point, the subsequent lows were at a higher level such as the April 2 low of 23,306 followed by May 3 low of 23,467, confirming the advancement by the bulls.

Interestingly, the small-cap stocks are doing much better than the DJIA, S&P 500 and Nasdaq 100 index. The S&P 600 small-cap index and Russell 2000 index have both recently broke new record highs, erasing the striking selloff in early February. The VIX index has also traded comfortably back below the 20 range and in fact stayed below 15 for the past two weeks, further confirming the risk-on appetite mode is back in full force again. Hence, expect the current risk-on sentiment to usher in further buying momentum back to the main US equity indices.

In summary, the price action is supportive for a bullish move higher with the ongoing triple bottom rejection off the 200-day moving average. The next target for the bulls is the 25,774 resistance area followed by 26,684. This bullish outlook is true for the S&P 500 index and the Nasdaq 100 index.

  • The writer is chief technical strategist, Phillip Securities Research.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice

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