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Is This The Top?

Oct. 29, 2014 11:09 AM ETSPY1 Comment
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So as we discussed in our last post (Stock Markets Close To A Bounce), we had a bounce. We said there would be one and there was.

I have to admit, I did not expect the bounce to be this strong in terms of price movement.

The correction that began September 19th and lasted till October 15th, has been almost fully reclaimed by some indexes (e.g. the NASDAQ) and nearly reclaimed by others in less than 2 weeks. The S&P 500 index as an example was down 9.82% in 4 weeks and rose 9.26% in two weeks! What a roller coaster ride!

Now I would love to tell you this is normal! But in fact, it has been anything but normal!

First of all, about 80% of all corrective bottoms retest the lows. We did not have that (at least not as yet).

Second, as markets move back up following a correction, volume usually increases. We do not have that! Just look at the volume on the S&P 500 SPDRS (Symbol SPY), below!

Does that look like healthy volume?

Instead, market makers (and other mysterious forces) have pushed stocks up and up since it appears no one wants to bite here. The only way to get them to bite is to force them to via unusually large moves in stocks that force managers to participate or get left behind.

We stated in Stock Markets Close To A Bounce that the next important thing to watch was do we move to new highs or form a lower high and the possible beginning of a new bear market? Now the simple answer to that question is we don't have enough evidence yet. We are near new highs on several indexes, but we have yet to fail at the highs or break to new highs.

However, I do believe the volatility Index is telling us something or maybe giving us an advance clue to what will be happening at the highs. Just take a look at the S&P 500 Index relative to the Volatility Index or VIX.

Notice how the trend for this relative price chart is now turned down as referenced by the 50 period moving average (blue line). Also note how the recent rally has just taken us back to the average, typical in bear periods for price charts. Finally, note how the range for this relative price chart is increasing, not decreasing in size.

This pattern of an increasing price range is called a Broadening Formation. According to Investopedia, this "pattern that occurs during high volatility, when a security shows great movement with little direction. The formation is identified by a series of higher pivot highs and lower pivot lows. A trendline drawn over the pivot highs and under the pivot lows frames out the widening pattern. It looks like a megaphone and, in fact, it is also known by that name."

Now the sick part about our formation, above, is our megaphone is slanted down. This is very unusual and I believe reflects a very, very sick market!

Could I be wrong? Of course, but I will surmise that we are in the last few days or months on this bull cycle and I do believe a bear market is just around the corner! The good news is that trend followers do very well on a relative and absolute basis in bear markets and I cannot wait for it to get here!

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