After five straight weeks of key indexes losing ground, have the markets technically broken down or are they way oversold? Let’s take a look at the Dow (chart) and the S&P 500 (chart). First the Dow, without a doubt the 50-day moving average support line has been broken, however the RSI has not yet reached oversold conditions (chart). The moving averages in particular the 50-day and 200-day, and the Relative Strength Index (RSI)are closely watched technical indicators by many hedge funds and institutional investors as a premise to the short and mid-term direction of a given stock or index. The S&P 500 (chart) has a very similar chart pattern as the Dow Jones Industrial Average (chart) with a breakdown of the 50-day moving average and is not quite in an oversold condition with the RSI.
As with any chart patterns, there are support zones within the bigger picture and right now it appears that the S&P 500 is at a critical support area in the 1295 to 1300 level. If this current level fails, then most technicians believe that the 200-day moving average will be the next significant support zone and that is yet another 4% or so down from here. Should that be the case, then we could be looking at an overall 10% correction in the markets in which certain market technicans would view this event as a healthy correction in a bull market. We will see if this scenario plays out.
Good luck to all 🙂