Losing streak continues for second week with potential for further losses ahead

This week is set to end on a negative note after seeing European markets continue the downward trend established since mid March.

What appeared to be an opportunity for the bulls to lift the markets higher in April has now turned out to be just a minor pullback. Does this set the stage for a serious correction into the rest of May?

Currently we have seen the FTSE 100 flirting with the 5500 level after struggling to break above the all-important 6000 level. This week alone the index has fallen by 3.59% to trade at a low of 5464 but has managed to claw back some of the losses in Thursday’s session. Today, however, sees the potential for the index to close below 5500 which could then set the path for 5424 – 5390 coming into next week.

For the German DAX the picture remains similar in that the index fell in line with other global markets. During October 2011 to November 2011, the Dax fell by 16.55% and if this is anything to measure by then we would need to see the index stay below 6536 to reach for 6130. It took just four weeks from the October to November decline whereas the current decline has so far taken eight weeks and only reached 62% of the previous measurement.

This tells us that the bears are finding it difficult to accelerate this correction which indicates that once the corrective move has completed there is an opportunity for the bulls to bring positive momentum back and lift the markets up quickly.

But given the patterns that are developing in the indices there are some distinctive worrying aspects that are showing we may not be out of trouble just yet.

On the intermediate term timeframes we see weekly charts showing an orderly pullback. The daily charts are showing a more choppy landscape and from a technical point of view, there is a series of lower highs and lower lows which is marking the trend as weak. This helps to conclude that the weeks ahead are likely to bring in further volatility as we see stock indices try to establish a bottom to then move higher again.

For now the trend remains to the downside and any moves to the upside may at least, for the short term traders, offer an opportunity to jump onboard and establish short positions.

Commodities such as gold and crude oil have also not escaped the wrath of the bear. We note that gold has broken below its important $1,630 level and reached the $1,585 target. For the very short term the metal may seek to head upwards to test the $1,600 level but the trend is bearish and until a key reversal has taken place further downside cannot be ruled out just yet.
Crude oil remains below $98.00 per barrel and after eight days of negativity, the commodity is showing signs of a short term correction to the upside. Oil will need to break above $97.70 to confirm this idea to then test the psychological $100.00 target. Failure to hold onto $95.15 would only open the door to see oil reach for $93.25.

As markets try to find a foothold for an attempt to rally traders should be braced for a continuation to the downside until the charts suggest otherwise.