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Stocks Struggle to Break Out of Trading Range

|Includes:DIA, QQQ, SPDR S&P 500 Trust ETF (SPY)

The S&P 500 index closed sharply lower today, moving back into the trading range between 1,120 and 1,220 after breaking slightly above resistance at the upper boundary on Friday.

We are 10 sessions into the short-term cycle from the beginning of October and the sharp decline today indicates that the Alpha High (AH) may have formed on October 14, although we would need to see additional weakness during the next few sessions to confirm that development. A brief alpha phase decline followed by a move above the AH would reconfirm the bullish translation of the current cycle and forecast additional short-term gains. Alternatively, an extended decline that moves down into the lower half of the trading range would suggest that cycle translation remains in question.

Regardless of how the current cycle develops, we will be monitoring its character closely for signs of an important reversal. We have been expecting the development of another recession since the long-term distribution pattern broke down in early August. During the last three months, several reliable indicators have signaled that a return to economic contraction is highly likely, including the recession warning composite tracked by fund manager John Hussman, and the Economic Cycle Research Institute (ECRI) recently joined the recession camp at the beginning of the month. According to the most objective, reliable measures at our disposal, the likelihood that we are entering a new recession in the US is now above 90%. Consequently, the stock market will likely experience a decline of 30% to 50% during the next 12 to 18 months and the new cyclical bear market from May should resume once the current rally breaks down. Therefore, we will be monitoring market behavior closely during the next several weeks in anticipation of this important long-term signal. We will identify the key developments as they occur in our market forecasts and signal notifications available to subscribers.

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Stocks: SPY, DIA, QQQ