Remember the “green shoots” that government officials like to talk about whenever the economy is weak and elections are near? They never talk about “brown leaves”. But markets are more honest, they show us brown leaves as well as green shoots in a candlestick chart. This week we have what I call a “brown leaves” formation on the Nasdaq, signaling the possible start of a market autumn:
This is not an official technical formation, but perhaps it should be. Brown leaves happen when after a significant rise in the market you get a top followed by two lower highs with subsequently lower lows in between. So, three clearly distinct legs to the downside, each time falling lower and trying (but failing) to recover the losses on rebound attempts. The third leg down should partially overlap the first leg down and there should be relatively few good green candles within the pattern, as you see in above example. This pattern usually forms within one or two months on a daily chart. This formation is not a good omen and often leads to a much bigger correction. The warning sign stays in effect until the market takes out the high that started the brown leaves formation, or until a significant new low is made below the bottom of “leaf 3”.
The S&P 500 is holding up better than the Nasdaq recently, and is following the scenario we set out two weeks ago. The 1880 barrier was not overcome convincingly and now this market is starting to pull back as well (click for larger image):
Bearish divergences in my technical indicators are once again very prominent in this chart, and the S&P is starting to look increasingly tired as it keeps struggling to reach the upper boundary of its long term trend channels. We remain in a lunar red period for 10 more days, so more downside action is likely. The 1800 level is the first line of support, followed by 1750. The scenario for a test of the 1600-1700 area this summer remains firmly on the table.