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Erik McCurdy
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Erik is the senior market technician for Prometheus Market Insight and has been performing chart analysis since 1995. The software program that he developed to monitor long-term stock market trends has correctly identified 92% of the cyclical turning points in the S&P 500 index since 1940.... More
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  • The Stock Market Bubble Bursts

    Since early June, we have been monitoring developing weakness in the historic stock market bubble that suggested the bull market from 2009 was becoming susceptible to a long-term reversal. In early August, the Dow Jones Industrial Average (DJIA) experienced a confirmed long-term breakdown when it moved below support at its 200-day moving average. Last week, the S&P 500 index followed suit and experienced a confirmed long-term breakdown as well. Since moving below its 200-day moving average on August 20, the S&P 500 index has declined 9%. Although the violent nature of the move during the past 3 sessions has left many commentators in the financial media perplexed, this type of behavior is fairly typical from a historical perspective when a highly speculative bubble experiences a confirmed breakdown.

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    Moving out to the intermediate-term view on the weekly chart, the S&P 500 index has now retraced all of the gains since October. There is no meaningful long-term support below current levels until the 200-week moving average at 1,708, so it is highly likely that the developing correction will test that support level.

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    We note often that a long-term top is a process, not an event. Now that the massive distribution pattern on the S&P 500 index has experienced a confirmed long-term breakdown, it is highly likely that the cyclical bull market from 2009 has terminated. Given that the current bubble in stocks is one of the largest and most speculative of the past 100 years, the developing cyclical bear will be extremely violent by historical standards and the S&P 500 index will likely decline from 40% to 60% by the time the next cyclical bottom forms. Additionally, price behavior will be characterized by wild, extreme moves in both directions much more than it has been during the past several years as the new cyclical bear purges the speculative excesses from the market.

    Aug 24 8:42 PM | Link | 1 Comment
  • Dow Jones Industrial Average Confirms Long-Term Breakdown

    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. In late July, we noted the formation of negative divergences between the major stock market indices and this week the Dow Jones Industrial Average (DJIA) confirmed its recent break below long-term support at the 200-day moving average. The DJIA has been trending lower since May and its 200-day moving average is now behaving like resistance after acting as support during the past several years. This shift in behavior is an important bearish development that increases the likelihood of the long-term reversal scenario. Additionally, a bearish "death cross" is imminent as the 50-day moving average prepares to cross below the 200-day moving average. This moving average crossover could occur as soon as the next session and would be yet another signal that the bull market from 2009 is in the process of terminating.

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    From a weekly perspective, the long-term breakdown of the DJIA has taken the form of a confirmed close well below the 50-week moving average. A subsequent weekly close below current levels would confirm the start of a new intermediate-term downtrend and predict a return to the 200-week moving average.

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    The S&P 500 index has not experienced a similar breakdown, but it has begun a third test of critical long-term support at the 200-day moving average and it is on the verge of confirming the start of a new downtrend.

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    The S&P 500 index has been forming a massive distribution pattern for the past nine months. This type of formation often develops during the terminal phase of a bull market as upward momentum dissipates and long-term holders reduce their positions.

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    Accompanying this sideways movement in price behavior, we would expect to see significant deterioration in market internals. As expected, breadth and volume summation indices have been negatively diverging from price behavior for the past year and both measures have declined to their lowest levels of the past several years.

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    A similar distribution pattern formed at the top of the stock market bubble in 2000.

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    The stock market moved swiftly lower after the formation broke down and the S&P 500 index ultimately lost nearly 50% by the end of 2002.

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    We are in a similar situation right now as stock market investment risk holds near the highest level of the past 100 years, and it is highly likely that the forthcoming cyclical bear market will result in losses of 40% to 60%. Therefore, we remain fully defensive from an investment perspective and we will continue to monitor market behavior for the next sign that a long-term reversal is in progess.

    We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers. Try our service for free.

    Aug 11 1:57 PM | Link | Comment!
  • Stock Market Cyclical Bull Rebounds Off Of Critical Long-Term Support

    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.

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    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.

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    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.

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    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.

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    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.

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    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.

    We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers. Try our service for free.

    Jul 13 11:50 PM | Link | Comment!
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