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Dow, SPX Fall Off the Cliff?


If secondary trendlines are broken, the way down will be steep.

As 2009 began, there was a glimmer of hope among investors. This proved fleeting: By the fourth trading day of the year, the markets had begun another leg down just after completing a 28% move upward off the November 21 low.

Needless to say, even with that "secondary" counter-trend bull move, the market still remained down 40% from the October 2007 high. Again, I point this out for the sole purpose of relating it to the markets' technical development through 2009 thus far.

Within the first quarter, the SPX dropped 30% and began its latest secondary bull move on March 6. As discussed in my firm's first quarter report, this still left the markets down almost 12% for the quarter - yet another record.

Since the second quarter began, the secondary bull-market rally has seen some astonishing resilience; to be honest, it was somewhat more than I was expecting. Nevertheless, this latest counter-trend rally off the lows, as of yesterday, has put the SPX back to its 2009 starting point.

Okay, that's the good news. Now for the rest.

Technically, the markets are at a very large inflection point with a triple convergence of resistance:

  • Cyclical Bear Market downtrend line (RED)
  • 200-Day Moving Average (DMA)
  • Horizontal Resistance dating back to November

Click to enlarge

This 2-year chart of the SPX gives a good view from a helicopter of the intent of this article, but let's take a closer look. For this, I want to turn to the third youngest sister, the NASDAQ. I believe the market has already broken the secondary bull move and is transitioning back to bear.

Click to enlarge

Realizing this graph is very busy, I'll bullet the technical points:

  • On May 7, the NASDAQ had a massive key reversal day (and bearish engulfing), with the largest volume since October of last year.
  • This corresponded to its 200-DMA and the horizontal resistance from the same time period.
  • 3 days later, the NASDAQ broke the secondary bull market line.
  • The NASDAQ bounced off the horizontal support with what seemed to be no volume
  • Yesterday, the NASDAQ retested the 200-DMA, the horizontal resistance, and its latest high, then completed another reversal day on increased volume.
As for now, it has all ingredients to make an imploding bomb. The only thing that would reverse my thinking at this point is if the market somehow increased above the horizontal resistance points on massive volume. The probability of that happening is, well, similar to that of finding a needle in a haystack.

The youngest sister (the Russell 2000) is very similar in technical stance: I believe the secondary trend is broken, and the index is once again transitioning to a bear-market stance.

Many pundits have been clamoring for an end to this latest bull move, including myself. Until now, the evidence didn't justify the claim. The key to completion, in my humble opinion, is when the 2 eldest sisters (the Dow and the SPX) break their secondary trend lines. When this occurs, it could be like lemmings off a cliff; the next move down could be just as violent as 2008.

Everyone is waiting for something to happen; it hasn't yet, and the tension is building. When it begins, no one will want to be the last man standing. Given the road signs and the overwhelming fundamental evidence we've seen lately, I have to conclude that not much has changed in the economy.

I don't believe it's a question of whether or not it will happen - the only question is when.
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