We’ve seen a notable increase in market volatility during recent sessions, and when confusion reigns, many of us look to the charts for further guidance. While similar conditions currently exist in credit, rates, commodities and FX, the high visibility of the equity indices places much of the global investor community’s focus squarely on stocks, so this is where we’ll concentrate.
First, let’s take a look at the NASDAQ-100, where the experiences of a few months ago might be instructive.
During the winter and spring, investors watched nervously as events unfolded in the Ukraine. Protests in Kiev turned violent, Yanukovich was removed from power, and pro-Russian separatists in East Ukraine and Crimea began to take control over parts of the region. On March 18, Russia annexed Crimea, leading to an escalation of tensions between east and west. Ukraine appeared on the brink of civil war, economic sanctions were imposed on Russia, and international political rhetoric heated up. Investors became understandably nervous, pushing equity prices lower and volatility higher.
Then, on April 15, the NASDAQ-100 index tested its prior 2014 low just above 3400 (its third test of that level) and finally found some support. That evening, Janet Yellen gave a speech and spoke of the Fed’s “continuing commitment” to support the economic recovery. From that point forward fear gave way to relief and US stock indices never looked back, going on to set new record highs just two months later.
The general pattern of price movements in the NASDAQ-100 during that period appears very similar to the patterns we’re witnessing currently, as investors now contend with the uncertainties arising from the spread of Ebola, the spread of ISIS, the imminent end of quantitative easing in the U.S., and disappointing growth in both Europe and Asia. Like in April, the index is approaching a third test of recent lows, this time in the 3840 area where the market bottomed in July and again in August. Given recent experience, this is sure to be a very closely watched level.
If 3840 gives way, it is reasonable to expect further losses to follow as stops get taken out and new shorts pile in. Where it might then begin to find more meaningful support, however, is difficult to say. The move from the 4118 high down to 3840, a 280 point move, would project a potential symmetry target of approximately 3560, but that’s probably still a good ways off.
Nonetheless, given the weakness into the close on Friday it seems that at least a probe of this 3840 area is in the cards. The S&P500, by the way, has a corresponding support level at 1905 – pretty much right where it closed on Friday – and this also bears a very close look. 
It is also worth noting that the S&P recently broke a well defined trend-line and closed the week right on its 200-day moving average, which it hasn’t so much as touched in almost two years.
If these indexes are able to muster a bounce off current levels, the focus will then turn to their last high-before-the-high, where technicians and traders will no doubt wonder whether the right shoulder of a larger head & shoulders top is being formed. These potential “shoulders” reside at 4000 for the NASDAQ 100 and 2000 for the S&P 500, nice round numbers both, but as of right now this seems the less likely scenario.
Meanwhile, let me highlight one other chart that I think is worth looking at. This is Germany’s DAX index, where important support levels were broken on Friday completing what some are already calling a major head & shoulders top.
This pattern would classically project further losses towards 7750, a decline of more than 20% from its highs and putting the German stock market firmly into bear market territory. It’s already down more than 12% from its highs, making this decline a bona-fide correction, something we haven’t seen in US markets in almost two and a half years.
So no matter what you trade, it’s probably well worth your time to keep these levels in mind as we head into the middle part of October, historically considered one of the scariest months for stocks. With such important and highly visible technical levels at our doorstep, things could indeed get very interesting this week.
Good luck and happy trading,
D
