BullBear Trading: Stock and Financial Market Technical Analysis

08/09/14 BullBear Market Report: Intermediate Term Bear Market?

 In the last BullBear Market Report I called for a 5th wave rally in the new secular bull market in US stocks that began in November 2012.  The market did rally to a July high and now the the question on the table is whether or not the May-July rally represents the entirety of the 5th wave or merely the first wave of a larger scale sequence.  The analysis in this report tends to support the conclusion that we have seen the completion of a 5 wave bullish impulsive Wave (1) sequence from the November 2012 low and the market is now in the early stages of a Wave (2) correction.  Last weeks apparent low was most likely the A wave bottom to a larger, longer duration and probably more complex corrective process.

This does not mean that we are necessarily looking at anything as scary as the 2000 or 2007 tops.  The correction will probably be more likely comparable to the 2010 episode (that included the "flash crash").  There may be a few days that seem somewhat apocalyptic, but in general the market will be supported by buyers who have been waiting patiently for a long term entry point.

There certainly are quite a few catalysts out there that can serve to shake weak hands and momentum players out of the market.  Geopolitical concerns in the Middle East and Eastern Europe as well as renewed debt worries in Europe and Latin America may be enough to keep the markets on edge and prevent buyers from committing until a decent technical reset develops.

If the rally off the current low speeds to a new high without displaying any corrective wave characteristics and if the accompanying technical signals are strong, we may conclude that Wave 5 of (1) is not yet complete.  But if the rally fails to produce a new high or does so while showing a host of bearish technical divergences, we will have to conclude that a correction is indeed under way.

Also please note that even if we are in the Wave (2) correction now, that does not mean that it must result in a large decline.  It may very well result in mostly lateral triangular formation...as we have seen many times before.



Chart analysis of a cross section of US indices and sectors yields three main conclusions that support a Wave (1) top:

  1. A relatively clear 5 wave structure
  2. Trendlines from November 2012 broken or challenged 
  3. Moving average support broken or challenged

SPX futures chart shows an arguably completed 5 wave structure with the final wave an ending diagonal. 

We've seen a substantial period below the 20 and 50 day EMAs, which are now positioned for a bear cross.  A secondary trendline has been violated....




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