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Tuesday, November 19, 2013

Daily update 11/19

Down side follow through.  That is more then we can say for the last two reversal days.  The more significant development might be that new highs were only 76.  Every time new highs dropped below 90 since May it has meant the top was in and SPX was headed for the 100 SMA.  Will history repeat or will it be different this time?  Here is the daily SPX chart.

The market tried to rally three times today and each bounce was met with selling that knocked it back down.  That certainly is different then the last few weeks.  Lets take a look at the McClellan summation index.

First of all this is extremely weak for all time highs.  I consider anything under 700 at highs to be weak.  This is the first time the indicator is below the 20 SMA at the highs.  This would seem to back up the idea the last few weeks may be a distribution pattern.  But wait there is more.  Here is the number of stocks above their 200 MAs.

This indicator is also below its 20 SMA.  It has clearly diverged over the last few weeks from price as well.  These two indicators are already on sell signals with price at new highs.  Clearly the market is in the weakest technical condition it has been at the highs this year.  I think there is a pretty good chance that if we continue down here SPX will not stop at the 100 SMA this time.  It has not touched the 200 in over a year.  Maybe it is time.

Bull market tops are defined by two points.  The first point is where smart money starts distributing stock to dumb money.  The second point is the final high before the bear market starts.  This second point can be higher or lower then the starting point.  In 2000 it was lower while in 2007 it was higher.
The current formation is kind of odd for a top.  However, market internals really look like the distribution phase started in May.  They are also weak enough currently that this could be the final high.  The current market environment is very much like a bull market top.  Speculation is running rampant and a large majority of market participants believe the market can only go up.  In 2000 and 2007 SPX dropped below its 200 SMA between the initial high and the final high.  We don't have that in the current chart as SPX has constantly been caught at the 100 SMA.  I don't know if that is a reason to say this is not the final high or not though.  This feels like it could be it.  First things first though.  Lets see if the market actually goes down from here.  The first key level on SPX is 1775.  A close below that would indicate a failed break out and increase the odds of further down side.


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