by Erik McCurdy, Prometheus Market Insight
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, and that critical support level was tested last week before the S&P 500 index rebounded sharply during the past two sessions.
Technical indicators are now effectively neutral overall on the daily chart, suggesting that short-term direction is in question.
With respect to cycle analysis, the strong advance during the past two sessions indicates that the beta low (BL) of the current short-term cycle likely formed on July 8 and not on June 29.
However, the magnitude and duration of the alpha phase decline that occurred from late June until early July continues to signal the likely transition to a bearish translation, so the most likely scenario with respect to the second half of the current cycle is a weak beta phase rally that fails to move above the alpha high (AH) in June followed by a move below the last BL during the beta phase decline.
Alternatively, an extended beta phase rally that moves up to a marginal new long-term high for the cyclical bull market followed by a shallow decline into the next short-term cycle low (STCL) would suggest that cycle translation is in question.
It is important to note that these violent moves in both directions, which have been occurring on a regular basis for the past year, are signs of distribution and speculative exhaustion. They are absolutely not signs of a healthy uptrend.
The weakness in market internal data such as breadth and volume has developed in tandem with this distribution pattern, increasing the likelihood that we are in the early stages of a cyclical top formation. Of course, the formation of a cyclical top is an extended process that usually takes six to twelve months to complete, so it is much too early to draw any conclusions from a long-term perspective. The next test of bull market health will occur during the beta phase of the current short-term cycle. If the S&P 500 index tracks the bearish short-term scenario outlined above, resulting in a confirmed break below the 200-day moving average, the long-term topping scenario will become more likely, so it will be important to monitor market behavior closely during the next three weeks.
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