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US Markets Wear the Heavy Crown -- S&P 500 Update

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Heavy is the head that wears the crown. Here's the status of the US stock market.

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The US market is one of very few trying to maintain a long-term uptrend bull cycle around the world. Most major world indices are in decline; only Germany and London are also trying to hang in of the major indices.

Will the rest of European problems continue to spill over and weigh down our markets and finally cause a flush? Or will the US stay strong and lead higher amid the turmoil?

The threat of debt repudiation resonates throughout Europe and has major headwinds for the banking industries and otherwise, and it may be hard for the US market to gain much traction until we find out if there are any resolutions near term.

The technical picture is mixed. The drop to 1292 from 1422 highs created a 38% Fibonacci retracement of the October lows at 1074 and the March highs of 1422. This is typical for a fourth-wave correction after three waves of rally. In addition, we had McClellan oscillators at extreme lows coming into this past week, investor sentiment running at multi-month lows not seen since last summer, and many other oversold indicators.

These factors led to a 36-point bounce early in the week from 1292 to 1328, but it had trouble holding into the end of the week. I was looking for a strong close over 1322 to help confirm the downtrends lows were in place at 1292, but we did not get that just yet. Near term, we have to see a very strong bounce this coming week over 1330 on a closing basis or the market will be at risk of a rising bearish wedge and then another large downleg to new lows since the 1422 highs. Therefore, Tuesday and Wednesday will likely immediately tell us which way this market is about to go.

We have a few outlooks that are valid. One is that we had an ABC correction from 1422-1292 and we are in the early stages of a Major Wave 5 up bullish pattern. The other is we had three waves down, this is a fourth wave bounce, and a fifth wave to new lows on the move is next. Again, early in the week will be key.

Below are two charts. One shows the weekly S&P 500 (^GSPC) pattern and prior pivot points where downtrends halted and reversed. In each case, the candlestick pattern for the week was inside and above the prior weeks lows and closed higher (White Candlesticks). This also happened this past week, but I again would like to see higher closing levels early in the week to confirm.

The other chart is a daily chart showing the 1330 barrier we would like to see crossed to avoid a rising bearish wedge pattern.


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Twitter: @activetrading

Editor's Note: David Banister is the chief investment strategist and co-founder of ActiveTradingPartners.com, a small-cap portfolio and market advisory service.

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No positions in stocks mentioned.

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