A few warning signs

A rare mid-week post because the market is reaching a critical point. The recent lunar green period has ended with a 55 point gain, which looks quite good. But yesterday’s market action in the S&P 500 was weak and that has turned down the MoM indicator. That’s not a big deal as such, but a few other developments need to be watched right now.

1) The number of bullish stocks in the S&P 500 has been weakening all summer and has now dropped back below 50% (based on reversal levels method). At the same time the S&P is at the verge of dropping below its up trend line that has been in place since the Jan-Feb lows. Here is the chart:

The market hasn’t really recovered well from the September mini-panic, and a few attempts to get back above 50% bullish stocks have failed systematically. This means the risk of a second leg down is going up significantly, especially with a lunar red period now getting underway. If the trendline gives way then the major support near 2120 may not hold up either and then we would probably get a sharp drop to the June lows.

2) The “iceberg” chart for S&P 500 is not looking good either:

Bullish energy (green) has disappeared since late August and has still not come back. Until that happens we have to consider the scenario that the September drop was only the first step in a bigger correction or consolidation period.

Bottom line: We are very likely to get a clear direction in the next week or two. If the S&P 500 can hold its existing trend line then it should be printing new highs before the end of October. And if it doesn’t print new highs, then the up trend will be broken in the coming weeks.