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Charts Suggest Further Downside Awaits Market


The market appears to need at least one more leg down, and may be in the early stages of an intermediate decline.

It's unusual that I feel this confident about the market's future. Doesn't mean I can't be wrong (long-time readers know I'm quite capable of being wrong sometimes; and according to my wife, I'm wrong exactly 100% of the time, so she'd probably fade me) -- but I'd say I'm roughly 75% certain that the market has another leg down in its not-too-distant future.

I'm going to start off with the Philadelphia Bank Index (INDEXDJX:BKX), which I watch closely since it has performed as a leading indicator of the broad market for the past several years. On September 23, I wrote:

"The Philadelphia Bank Index continues to look weak, and may be the canary in the coal mine here. Long-time readers know I believe that trouble for BKX equates to trouble for the broad market, and BKX still looks like it wants new lows."

BXK has since made new lows -- and the decline there doesn't look finished. Based on the mid-term historical evidence, I simply don't believe any rally in the S&P 500 (INDEXSP:.INX) can grow legs if the banks aren't participating.

Click to enlarge

Further adding to my confidence is the fact that the decline from the all-time high in the S&P 500 appears to have been an impulse. This suggests at least one more leg down of equal or greater length.

Click to enlarge

This has been a market that's difficult to get too far in front of, but I continue to feel that a larger intermediate decline is pending. The chart below shows only my first target zone, but I currently suspect we're headed into the 1500s at the minimum before it's all said and done. I'll reassess that thesis if and when the blue box target is reached.

Click to enlarge

In conclusion, I feel fairly confident that the decline from the all-time-high was impulsive, and I thus expect the market has at least one more leg down still to come. Further, based on the larger wave structure, I suspect this is actually the early stages of a bigger decline. Nevertheless, once another leg down forms to allow the potential of a complete ABC (assuming I'm not dead wrong, of course), I'll revisit that intermediate thesis. Trade safe.

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No positions in stocks mentioned.
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