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Stock indices may drop again soon – here’s why

Stock indexes recently had a relief rally in a devastating bear market. However, the downtrend may return.

This year has been challenging for almost all investors. Stock indices, cryptocurrencies along with other assets rapidly declined in price, which made a lot of market participants look for a bottom. Buying the dip for a millionth time, however, resulted in a loss for many. 

Some ways investors can avoid heavy losses are dollar-cost averaging or looking in which direction the asset is moving. Currently, there is an obvious bear market on stock indices and many think the recession is over. But is it?

DAX is significantly overbought

DAX finally hit our target, so we are turning bearish. While the recession is ongoing, the German stock index rose by 21% in just a month and a half. This is more than twice the average annual return of the S&P 500. So when DAX broke the trend line, a significant bullish momentum drew the market higher. However, can the momentum last?

Related article: Are metals ready to extend their rally?

DAX jumped to levels not seen since June, filling a weekly and a daily gap. The level of 14,440 posed a temporary stop on the stock index, possibly forming a peak. Bearish divergences also suggest another move downward is highly likely. Although there is a strong bullish trend line, DAX is very probably heading to the downside, unless something changes significantly. 

DAX daily chart, souce: tradingview.com

Better than forecasted inflation data from the US helped European and American stock indices jump, but the current market trend is just a relief rally. The bear market is still present, so traders, along with investors, should be cautious when entering long positions. A pullback to the closest support is still very likely, even if DAX should jump higher. Hence the profit target of approximately 800 pips.

S&P 500 near the trend line

S&P 500 also jumped after US inflation data came out by 5%, but refused to rise higher. This American stock index is in trouble unless it breaks above the trend line, because it’s holding the current bear market. S&P 500 recently filled the gap (the circle on the left) and bounced from a 200-day moving average (EMA). 

A bearish divergence also suggests that a move downwards is more probable. Volatility may be lower as the year ends, so traders can also expect a consolidation between the levels of 3,900 and 4,000. But if the index moves lower and the bearish signal is confirmed, S&P 500 could be heading even further than the last time – to 3234. 

S&P 500 daily chart, souce: tradingview.com

If the long-term uptrend is supposed to hold, it will be crucial to break the trend line, which could send the stock index back to 5,000 or higher. This is, however, very unlikely due to an ongoing economic downturn and clear bearish signals from the chart. S&P 500 may move to 3,800 or lower by the end of the year. 

Nasdaq below 10,000?

Nasdaq jumped even higher than S&P 500 during the inflation data report. This technological stock index soared 7% in one day, a little above the previous resistance, as seen in the chart below. Nasdaq is consolidating between its bottom and current resistance, also offering a short signal. A pin bar suggests the stock index might be moving to 10,440 or even lower.  

Also read: Crypto fund Grayscale declines to show proof of reserves

The OsMA indicator shows how overbought Nasdaq currently is and how it ended up last time when this occurred. On the other hand, Nasdaq still didn’t bounce from the trend line, or EMA200, like S&P 500 did. A little swing move upward may come to 12,000, but the stock index is still very likely to move below 10,000 in the upcoming months. 

Nasdaq daily chart, souce: tradingview.com

Conclusion

The stock market has been in a bear market since early 2022 despite the current relief rally. That’s a fact. Long-term investors may profit in the future, but certain technical and fundamental tools point to another move downward soon. Traders must stay cautious if shorting indexes as they rise in the long run, so don’t forget to apply risk management and stoploss. 

I got into financial markets by accident in 2012 and started with Forex trading. Later in 2017, I started investing in stocks in cryptocurrencies and began writing articles profess...

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