With major global equity markets trading off by 4-6% so far this week alone, the worst week in two months, we wanted to provide a quick update on a classic technical analysis pattern that points toward the potential for more weakness in the Dow Jones Industrial Average (DJIA), Germany’s DAX, and the UK’s FTSE 100 index.
All three major indices have formed well-defined head and shoulders patterns over the last five weeks. For the uninitiated, this pattern shows a transition from a bullish trend (higher highs and higher lows) to a bearish trend (lower highs and lower lows) and is often seen at significant tops in the market. With prices closing below the patterns’ “neckline” in all three cases yesterday, the patterns point to the potential for more downside in the coming days:
Source: TradingView, GAIN Capital
Of course, not every technical pattern plays out exactly as the textbook shows, so readers are encouraged to evaluate the fundamental and technical performance of the underlying constituents, as well as each country’s response to the ongoing COVID-19 pandemic, before placing a trade, but for followers of classic price action patterns, the bearish setup couldn’t be more clear for these major indices!