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posted on 19 January 2017

Stock Market Bull Faces Important Test

by Erik McCurdy, Prometheus Market Insight

On January 3, our computer models identified the likely formation of a short-term low in the stock market. The latest short-term cycle low (STCL) developed as predicted, but the initial rally phase of the new cycle has struggled to advance since the last week, suggesting that a short-term reversal has become more likely.

A quick reversal followed by a move well below the last STCL at 2,239 on the S&P 500 index would signal the likely transition to a bearish translation and favor additional short-term weakness. From an intermediate-term perspective, the stock market is also exhibiting early signs of a reversal. The current cycle from November has struggled to advance to new highs for the past five weeks and one of our proprietary intermediate-term cycle oscillators has already experienced a bearish crossover.

A subsequent weekly close below 2,252 on the S&P 500 index would generate an intermediate-term cycle high signal and predict additional weakness for two to three months heading into the next intermediate-term low in late March or early April. From a big picture perspective, the stock market continues to form a massive distribution pattern and it remains likely that the cyclical bull market from 2009 is in the process of terminating.

By holding interest rates near zero and engaging in quantitative easing during the past seven years, the Federal Reserve has created massive financial market imbalances and encouraged speculation. The gains experienced by the stock market since late 2011 have been driven primarily by monetary stimulus, as opposed to healthy economic growth, and this highly speculative advance will almost certainly be erased during the forthcoming bear market. However, it is always important to remember that a long-term top is a process, not an event. The character of the current short-term cycle will provide the next assessment of stock market health, so it will be critical to monitor market behavior closely during the next several weeks.

We will identify the key developments as they occur in our daily market forecasts and signal notifications available to paid subscribers. Try our service for free. If you are a paid subscriber, login to read the full version of this commentary.

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