Thursday, April 04, 2013

not looking too good

Here is a quick summary of the market's current position: it is at the level of the 2000 and 2007 tops while overbought and showing bearish divergences. This is a recipe for a big break but until the market drops below 1537 and stays there I can't say that this bearish dish is ready to be served just yet.

The top chart is a daily bar chart of the cash S&P 500. The move up from the November 2012 low has already more than matched the size of the June-September advance (blue rectangles). The red arrows represent the number of points above its 200 day moving average the ES has gone before beginning a substantial reaction over the past 18 months. Here one can make a case that the S&P may have a little bit more to go on the upside since it is still about 20-30 points shy of its maximum extension from the moving average.

It is important to note that these simple indications of an overbought market have developed as the average approaches the last two bull market high points: the 1553 top made in 2000 and the 1576 top made in 2007. This is an especially bearish combination since markets have a habit of targeting historical tops as spots where important reversals develop.

The second chart from the top shows the New York Stock exchange advance-decline line. It is telling the same story as the S&P chart. The advance-decline line has rallied from its November low by an amount which very nearly matches the size of its initial rally from its September 2011 low (biggest pair of blue rectangles).

The bottom two charts illustrate the fact that while the averages are advancing the advance is narrowing in scope.

The third chart from the top shows the 10 day moving average of the number of advancing issues on the New York Stock exchange. You can see two lower tops relative to the first top following the November 2012 low. Moreover, the last leg of the rally in the averages was associated with a clear declining trend in this moving average.

The bottom chart shows the 20 day moving average of 12 month new highs on the New York Stock Exchange. You can see that this moving average made its high in January of this year. The March rally in the S&P produced a lower top in this moving average.

It is clear that the breadth of the market indicators are flashing warning signs. That this is happening while the averages have moved about as far as one can expect on a single bull market up leg underlines their bearish message. That these two phenomena have developed at the time the market is trading only a handful of points from prices which started as pair of 50% drops is even more bearish.

As I have said in previous posts, Lindsay's three peaks and a domed house formation suggests that the next drop will carry the S&P below its November low at 1340 or so. A less bearish scenario would call for a drop to support at one of the two previous tops near 1420 and 1468. Either way it seems to me that a substantial drop lies dead ahead. A move below the low established on the Cyprus news (about 1537 in the cash S&P) would be the first sign that this drop has begun.

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