,” I highlighted significant technical weaknesses within the stock market, particularly narrowing market breadth. This condition warned that the stock market was becoming increasingly susceptible to a correction even though major market indexes were advancing.
Throughout this uptrend, the price movement of the index has largely remained within the confines of this channel. Each time the index has approached the upper boundary of the channel, it has subsequently experienced a decline, which I have highlighted with red rectangles on the chart. This repetitive behavior underscores the importance of the channel boundaries in identifying overbought conditions.
Despite the recent decline, the index remains near the top of the channel, suggesting that it is still long-term overbought. This overbought condition implies that there is potential for the index to fall much further, given that it is currently positioned well above the lower boundary of the channelchart mirrors the S&P 500 in terms of its structure, featuring an uptrending channel that has contained its advance over the same period.
A decisive move below the lower boundary of the channel in the coming weeks would be a significant bearish signal for the broader stock market. Recent Advance Reversal: The recent advance of IWM, though initially impressive, has reversed. While it hasn’t retraced its entire recent advance, it has fallen significantly alongside the major indexes over the past week.
The market is very overbought from a valuation perspective, with price-to-earnings ratios at historically high levels. This means stock prices are elevated relative to earnings, making the market vulnerable to a major bear market. Additionally, the economy is showing signs of slowing down. If the economy continues to weaken and slips into a recession, it would likely push stock prices substantially lower.
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