This is a good news/bad news or glass half full/half empty kind of a market.
What do you want first, the good news or the bad news?
Let’s think positively (or bullish as it’s called on Wall Street) first.
The S&P 500 (IVV) hit a serious pothole and is down 4.36% from its all-time high. The Dow Jones got clobbered even harder, down 5.95% from its ATM.
Good News (Bullish)
There’s been a lot of selling over the last ten last trading days (although most of the losses were caused by only three strong down days).
But for now selling pressure looks to be exhausted.
S&P 500 price action suggests that a short-term low is in place.
The S&P 500 (SPY) was originally published in Wednesday’s Profit Radar Report.
View enlarged S&P 500 chart here
Yesterday the S&P 500 found support at the green trend line with a bullish RSI divergence. The Profit Radar Report stated that: “Wednesday’s low may have ended the initial selloff.”
However, there’s an open chart gap at 1,733.45 and additional support at 1,730. Chart gaps often act as magnets, so I’d like to have seen the S&P close the gap.
That’s why the yellow projection anticipated a brief dip to close the gap. This may still happen, but with or without gap closure, odds favor a rally to relieve the oversold conditions (yellow projection). Next resistance to overcome is 1,775. A break below 1,730 would caution of another 'crash wave' lower.
Looking at the bigger picture, we should note that at the recent all-time highs, the S&P 500 and Dow Jones did not register the kind of bearish divergences usually seen at major market tops.
Bad News (Bearish)
There are a number of factors and indicators that suggest 1) a deeper correction and 2) an upcoming major market top followed by a ferocious bear market.
Based on Elliott Wave Theory (admittedly the oddball of technical analysis, but very helpful at times), the S&P 500 and Dow Jones (DIA) have finished a 5-wave move to the down side.
This suggests a 3-wave counter trend rally, followed by at least one more leg lower (see chart below for a simplified visual of Elliott Waves).
More important for the bigger picture, two long-term stock market cycles top and roll over in 2014.
Those cycles correctly anticipated the 1987, 2000 and 2007 market crashes.
A chart says more than a thousand words. The chart featured in the article below shows just how powerful those two cycles are.
Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.
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