- As July came to an end, the Nasdaq completed a bearish technical reversal pattern on its monthly chart, confirming a move to a long-term downtrend.
- However, the Dow Jones Industrial Average closed near its monthly high, a new all-time mark of 41,376.00, indicating its long-term uptrend was still going strong.
- While the S&P 500 also closed higher for the month, the focus is what happens with the index from the end of July through the end of October, just ahead of the next US presidential election.
Let me begin by saying this piece was going to be posted on Thursday, August 1. The plan was to immediately talk about what the long-term monthly charts for the three major US stocks were showing us at the end of July because there were some key developments as we rounded the corner into the Dog Days of Summer. However, Mother Nature intervened with a wicked storm, knocking out power to most of Omaha for at least two days. We were fortunate as Omaha Public Power District got our area up and running mid-morning Friday, though I know there are still parts of town without. No, it wasn’t Hurricane Beryl, but it was one of the worst storms I’ve ridden through in nearly 60 years.
With that out of the way, let’s take a belated look at what we saw with long-term trends for the three major US stock indexes as July turned to August. I’m going to break with tradition and start with the Nasdaq rather than the S&P 500 for a couple reasons. First, the Nasdaq has led the last couple trend changes in the financial market sector and second, the implications of the S&P 500 settlement go beyond market analysis into the realm of US politics. How’s that for a teaser?
As we approached the end of July, the Nasdaq ($NASX) moved center stage in the equities sector because the index had positioned itself for an almost certain[i] bearish technical reversal given how far below the June settlement of 17,732.60 it was sitting. When the dust had settled, the Nasdaq finished July at 17,599.40, down 133.20 for the month. At face value, this doesn’t seem like much, but the discussion changes, from a technical point of view, if we include everything else the index did during July. The Nasdaq extended its major (long-term) uptrend to a new all-time high of 18,670.81 during July (July 11) before running out of gas. This led to a break back to a monthly low of 17,016.58 (July 30), still above the June low mark of 16,646.43.
Given what we have on the monthly chart for the Nasdaq, it creates a bearish spike reversal, confirming the previous major uptrend that began with a bullish spike reversal at the end of October 2022 had come to an end with the index rolling over into a new long-term downtrend. That being said, of the reversal patterns I look for the spike is not the most reliable, often followed by a quick recovery before heading back in the new direction. Had the Nasdaq taken out the June low before closing lower for July, after posting a new all-time high, the situation would’ve been different as the index would’ve completed a bearish key reversal. As the name suggests, this is a much more reliable pattern, one we can see on the monthly chart for the Dow Jones Industrial Average from the end of January 2020.
The first two days of August have seen the Nasdaq fall another 1,001 points, leading to much gleeful squawking from one side of the US political aisle as individually they try to shriek “Recession!” louder and more often than the next person. We’ve heard it so many times over the last few years I’m surprised anyone pays attention to them, but cults have strange ways of attracting followers. From an analytical point of view, next support for the Nasdaq is at the previous 4-month low of 15,222.78, just above the 20% retracement level of 14,966.80.
As for the Dow Jones Industrial Average ($DOWI), it finished July at 40,482.79, just off its monthly high of 41,376 and comfortably above its June settlement at 39,118.86. Since the Dow wasn’t close to completing a bearish reversal pattern last month, what we need to keep an eye on is a possible 4-month reversal during August. This puts support at the April low of 37,611.56. Regarding 4-month reversals: These are some of the more reliable patterns I look for, bullish or bearish, as it indicates a strong change in market sentiment. Unfortunately, in most markets that means we have to give a lot of space before a trend change is confirmed. For example, the Dow has to fall near 2,900 points before confirmation of a new downtrend is made. For the record, the Dow dropped 1,124 points the first two days of August, so there’s that to keep in mind.
Then there’s the S&P 500 ($INX). It was a mix of the other two indexes at the end of July, initially sitting below its June settlement of 5,460.48 before rallying to close the month at 5,522.30. Once the calendar page turned to August, though, the index saw renewed selling interest, losing as much as 220 points the first two days of the new month as it hit a low of 5,302.03 this past Friday. The previous 4-month low of 4,953.56 is on the horizon, growing a bit larger in the windshield as the S&P speeds down the highway.
But there’s another issue at play with the S&P 500. At least one investment strategy firm has connected the dots between the index and the next US presidential election. According to one of these strategists, “The prediction is based on the S&P 500’s price return between July 31 and October 31. A positive return from the index over this three-month period suggests the incumbent party will win a presidential election, while a negative return portends a change of power.” The article goes on to say the “S&P 500 returns have correctly predicted the outcome of each presidential election since 1984…”.
Given this, the aforementioned glee by some over a potential downturn in US stock markets makes more sense.
[i] Keep in mind the Vodka Vacuity tells us there are no Absoluts in markets. Hence the hedging of the idea of a bearish technical reversal.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
