In my post on Tuesday 4th August I was looking at the ambiguous setup on US indices and the Nikkei after the strong rally into the beginning of August, noting the three good quality topping patterns that were still intact on the Philadelphia Semiconductor Index (SOX), QQQ and Nikkei.
I also noted that SPX was close to the daily 3sd upper band, and said that I was looking for a short term consolidation of a week or so, to allow time for the daily middle bands to go higher, and for the daily outer bands to expand, opening up further possible upside. We have since seen that consolidation last for three weeks so far, the daily middle bands have turned up, and the outer bands expanded, but have since started to contract again.
Of those three topping patterns the high quality H&S on Nikkei has since failed with a target at a retest of the all time high but the but the topping patterns on SOX and QQQ remain intact. The H&S right shoulder high on SOX is at 13,249.07 and if that fails to hold as resistance the target would be an all time high retest, but so far that has not been in danger of failing, with a thorough backtest of the 50dma marking the high so far.
Moving on to this week there is a very good example here of something I talk about on a very regular basis, and that is the importance of the daily middle bands as support. We have seen some promising smallish topping patterns break down last week, but for the last few days almost all the stock indices that I follow have been fighting to hold their daily middle bands as support. So far these have been holding for the most part, and if that continues to be the case I’d expect to see some high retests starting soon.
On SPX the daily middle band has been holding as support for five days and SPX closed yesterday nine handles above the daily middle band, in effect a close on daily middle band support:
SPX daily chart:
On IWM the daily middle band has been holding as support for five days with a couple of closes slightly below, and IWM closed yesterday 0.08 handles above the daily middle band, a close almost exactly on daily middle band support:
IWM daily chart:
On DIA the daily middle band was broken for two days last week with DIA trading entirely below it on Thursday and Friday, but DIA broke back over it on Monday and closed well above it yesterday:
DIA daily chart:
Of the two non-US stock indices that I follow closely DAX has been testing the daily middle band as support for a week but again closed comfortably above it yesterday.
DAX daily chart:
On NIKK the daily middle band has been holding as support for five days with a couple of closes slightly below, and NIKK gapped below it at yesterday’s open below and then rallied to close back above it.
NIKK daily chart:
That brings me to the weakest looking indices on Tech, and if we are going to see some high retests then ideally Tech would be leading that move back up.
On QQQ the daily middle band has been tested as support over the last four days and both closes this week were visibly below it. That’s not a break down with much conviction yet, but it is a confirmed break down, with yesterday’s close confirming Monday’s break below the daily middle band:
QQQ daily chart:
Last and weakest is the Philadelphia Semiconductors Index (SOX) which broke below the daily middle band last Wednesday and has closed below it every day since. This failed hard at a double test of the 50dma as resistance over the previous week and of course still has an H&S which has broken down with a target a lot lower in the 9150 area.
SOX daily chart:
Which way will this go? Well it looks like markets may be waiting for NVDA earnings, which will be out after the RTH closes in the US tonight. NVDA is currently about 10% off the May highs and is also currently below the daily middle band. Earnings are likely to be strong and it will be very interesting to see how much attention is paid to those against NVDA’s exposure to an AI boom that doesn’t seem likely to deliver anything resembling a profit in the easily foreseeable future.
Warsh will also be delivering his keynote remarks at Jackson Hole on Friday morning and that too could be interesting.
Bottom line, this is an important support test for equities almost across the board, a failure to break down will likely deliver high retests, and a sustained support break here could take prices significantly lower. The direction of that break may well be delivered by the news over the rest of this week.
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