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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. His... More
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  • Stocks Enter Another Make or Break Window 2 comments
    Sep 26, 2010 3:02 PM | about stocks: SPY, DIA, QQQ

    The long-term topping formation in stocks that we have been monitoring since the beginning of the year finally moved above congestion resistance in the 1,120 to 1,130 zone on the S&P 500 index and is now testing resistance at the January high near 1,150.

    The market has experienced a series of sharp corrections and rallies following the long-term high in late April, and this type of price behavior is indicative of a market in turmoil as it struggles to find direction.

    Sentiment has tracked these violent whipsaws back and forth as the bullish and bearish camps have been encouraged by each successive move, but, as we often stress, short-term market vacillations only have meaning when analyzed in the proper context afforded by the long-term view.

    Although the break above trading range resistance in the 1,130 area has reduced the probability of a long-term breakdown during the next 4 to 6 weeks, the topping formation from late 2009 continues to suggest that a cyclical trend change is underway. The downtrend that began with a prototypical distribution process in April was accompanied by above average volume, while the subsequent reaction from early July has occurred on below average volume.

    Additionally, price action has formed negative divergences with money flow, momentum and oscillators as this long-term formation has developed, indicating that the cyclical uptrend from early 2009 is weakening. If the violent correction in May and June was indeed the beginning of a new primary downtrend, the low volume countertrend rally from early July should end sometime during the next week or two in the 1,150 area.

    Countertrend rallies often take the form of three-phase moves such as this one, but in order to confirm that the uptrend is in fact a countertrend reaction, and not the resumption of the cyclical uptrend, the advance will need to terminate soon. From a temporal perspective, we are now 12 weeks into the current intermediate-term cycle, so time would also be supportive of the development of a sustained downtrend during the next couple of weeks.

    As always, there are multiple possible scenarios, so we can never rule out alternatives. If the rally from early July breaks well above congestion resistance in the 1,150 area and closes at another new high on the weekly chart the odds will then favor a return to the April high near 1,215.

    We are at another important juncture with respect to the long-term trend in the stock market as it continues to wrestle with the economic outlook heading into 2011. The bulls believe we are still in the early stages of a recovery that will strengthen next year, driving corporate earnings much higher. On the other hand, the bears believe that the economy is likely tipping back toward recession, suggesting that risk assets like stocks are significantly overvalued at current levels. As chartists, we still favor the bearish scenario as the long-term topping formation on the S&P 500 index continues to favor an eventual breakdown to new lows. The deterioration in leading economic indicators that issued recession warnings this past summer should begin to show up in coincident data in October and November, so the debate will likely be resolved one way or another during the next 4 to 8 weeks. Stay tuned.

    Disclosure: No positions

    Stocks: SPY, DIA, QQQ
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  • Albertarocks
    , contributor
    Comments (2216) | Send Message
    Hi Erik... I had some troubles getting this comment published. We'll see if it works this time. I actually wanted to re-post it here rather than on one of your other instas but it appears it might show up in both. Great charts as always bud. Thanks again for posting them. I see your followers base is growing wildly... as it should. Very well done.


    I think we're at a decision point, or very nearly so. This article by ZH has more or less totally shattered my notion of what's coming down the pipe... at least the timing of it. I just don't know what to think anymore, except that the price action over the next month will probably answer the question.



    Some of the Elliott Wave blogsites are even beginning to see the possibility of something like what's shown in this chart below, although there are plenty of wavers in the bearish as well as bullish camps. Basically, at this point in time, they just don't know. Neither do I. lol



    When we think about what ZH is proposing, this chart wouldn't be impossible at all. Insane, yes.... but impossible, no.
    26 Sep 2010, 04:16 PM Reply Like
  • Erik McCurdy
    , contributor
    Comments (318) | Send Message
    Author’s reply » Hi Dan,


    That is the hyperinflation scenario that many folks (e.g. Jim Sinclair and John Williams of believe is imminent. A currency event of that magnitude would definitely cause the stock market to rocket higher like the Weimar Republic in the 1920s. Is it possible? Yes, but it is definitely an extremist view. I tend to be a bit more balanced in my analysis and I don't think it is a likely scenario at the moment.


    Of course, as chartists, we have the luxury of not having to try and figure out exactly what is going to happen long-term. As long as we continue to diligently monitor and correctly interpret market behavior, we will be prepared to profit from whatever scenario ultimately unfolds. I believe the Gold Currency Index will remain very sensitive to inflationary pressures and I'll be keeping a close eye on it for the foreseeable future. Interesting times, to say the least...
    27 Sep 2010, 01:57 PM Reply Like
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