Market Direction Mid Week Update©

Market Direction: BEARISH alert issued 8/10/2017

Is the stock market in correction 'mode'?

The stock market seemed to be under a great deal of pressure on Aug. 10.

Important support for the S&P 500 index(^GSPC) at 2460 had just been broken, and it appeared that a test of much more major support at 2400 was going to unfold.

But on Monday, Aug. 14, a very strong rally materialized, taking SPX back above 2460 and into its previous trading range (2460-2480). Simultaneously, a number of buy signals have occurred, including the VIX “spike peak” buy signal and the “VXST crossover” buy signal.

I found it very surprising that the market was able to put the brakes on the correction so quickly. But one cannot ignore the indicators. The upward shift had left support at 2437 — the lows of last week.

Now, we see that the market was just toying with everyone — as it is its job to do — and prices headed south in a strong way again. The support at 2437 was taken out, and the prospect of a test of the major support area at 2400 is back on the table. You can see from this first chart that the 2400 level has been important since early March, so if it were to be taken out, the entire picture would change to a bearish one.

We saw a strong rally in SPX on Tuesday, but it is merely a reflex rally in what is now a downtrend channel. Note the blue lines that highlight the lower highs and lower lows of recent activity. As long as SPX is within this channel, it is in “correction mode.” It would take a breakout over 2470-2475 to halt this downtrend.

The financial media is connecting this correction to the woes coming out of Washington, but in reality there is much more meaningful technical deterioration at work: it’s August (a bearish month, leading into the most bearish month, which is September), it’s a year ending in 7, and VIX was way too low for way too long. Those are much more important to the market than the media is allowing for.

Recent action has had the effect of increasing realized volatility so that the “modified Bollinger Bands” are widening rapidly. Recently, SPX probed down through the -3σ Band, but couldn’t get down below the -4σ Band, to set up a buy signal. The lower Bands are racing downward so rapidly now (due to increased volatility and falling stock prices) that it’s going to be hard to catch up. Even so, a close below the -4σ Band would set up a buy signal.

Even with the relative negativity of the above comments, it is worth remembering that as long as support at 2400 holds, the SPX chart will remain positive from an intermediate-term perspective.

Equity-only put-call ratios have remained bearish since early August. They were the only indicators to remain negative during the last reflex rally upward, in mid-August. So far, they have proven to be correct. The standard ratio is now racing higher, having reached the highest levels since last December.

In December, it was on the way down and was on a buy signal. Now, it’s on the way up and it won’t generate a buy signal until it rolls over and begins to trend downward. The weighted ratio is racing higher too, but not as quickly.

Market breadth seems like it is trying to get on the same page as the market and become a relevant indicator once again. The jury is still out on that. These oscillators have been very unstable and have switched back and forth between buy signals and sell signals far too frequently to be trustworthy. For the record, Tuesday’s strong rally has thrown them back to buy signals.

The cumulative advance-decline line, using “stocks only” data, hasn’t made a new all-time since late July. Thus there was a minor negative divergence with SPX which last made a new all-time high on Aug. 8. I wouldn’t consider that to be too bearish unless SPX were to return to making new highs, and the cumulative A-D line couldn’t follow. Even so, it is a departure from July, where cumulative breadth was strong and even led SPX into new all-time high ground.

There has been a bearish turn in another indicator: new highs vs. new lows. We have been monitoring these for a long time, and there has just been an endless stream of daily new highs dominating new lows.

But something has gone amiss, and now new lows are dominating new highs. This is sometimes the warning sign of a significant top. On eight of the last nine days, new lows have exceeded new highs (on the one day they didn’t, new highs only exceeded new lows by one issue). Over that seven-day period, new lows have averaged 121 issues, while new highs averaged 50. Is this bearish? In one sense, yes, because SPX is still near its all-time highs and is above support, yet new lows are dominating.

$tockMarketDirection proprietary model is currently BEARISH. We strongly encourage you to monitor positions closely, exercise proper money management strategies and follow us at  $tockMarketDirection for ALERTS we may issue advising a change in the current market direction. Stay tuned and follow us. If you have a testimonial or comment of how this website has helped you we would like to know, email us. Share with a friend.

The all-time lows since our initial recommendation to go SHORT this market. Here is how the markets have performed:

Stock Market Direction Recommendation (8/10/2017)
Dow	down 243.67 points a 1.12% gain	8/21/17
Nasdaq	down 39.68 points a 0.64% gain	8/21/17
S&P 500	down 20.86 points a 0.86% gain	8/21/17

Related Link: http://www.stockmarket-direction.com/