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posted on 26 July 2015

Stock Market Indices Exhibit Divergent Behavior

by Erik McCurdy, Prometheus Market Insight

For two months, we have been monitoring developing weakness in the historic stock market bubble that has suggested the bull market from 2009 is becoming susceptible to a long-term reversal. The short-term breakdown in early June was followed by a quick move down to long-term support at the 200-day moving average in late June.

That critical support level was tested in early July before a violent rebound returned the S&P 500 index to recent highs of the cyclical bull market. However, last week, prices reversed again and moved sharply lower, approaching the 200-day moving average for a second time.

The 200-day moving average is important long-term support and a confirmed break below that level would be a major bearish development, signaling the likely start of a substantial correction. While the S&P 500 index remains above that key level for the moment, the Dow Jones Industrial Average closed well below its 200-day moving average on Friday. A subsequent close below congestion support in the 17,500 area would confirm the breakdown and forecast substantial losses.

The Dow Jones Transportation Average broke below its 200-day moving average in April and this index has been trending lower since March.

When stock market indices negatively diverge in this manner, the behavior is yet another warning sign that a long-term reversal may be in progress. In isolation, this type of divergence is not a significant warning sign, but when combined with historic market risk andd eteriorating market internals, this price behavior is a meaningful development. As we often note, a cyclical top is a process, not an event, so it will be important to monitor market behavior closely during the next several weeks. If the S&P 500 index joins the Dow Jones Industrial and Transportation Averages in breaking below its 200-day moving average, the likelihood of a long-term reversal will increase substantially.

We will identify the key developments as they occur in our daily market forecasts and signal notifications available to paid subscribers. To receive our market forecasts and signals, login and then upgrade to a paid subscription.

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