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US Stocks on Verge of Joining European and Chinese Markets in Confirmed Long-term Downtrends

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

The S&P 500 index reversed large early gains to close slightly lower this week, continuing a test of support at the lower boundary of the cyclical bull market from early 2009. Technical indicators are bearish overall on the weekly chart, favoring a move down to new lows for the violent decline from July.

As we have noted recently, a confirmed break below long-term uptrend support at current levels would be one of the final technical confirmations that a new cyclical downtrend is underway. The only remaining confirmation would be a close well below the 2010 lows. The European Top 100 index has already broken below all necessary support levels, closing below its comparable 2010 low in August.

The weekly close well below congestion support in the 204 area confirmed that a cyclical downtrend is underway in Europe. In Asia, the Shanghai Composite has been trending lower since August 2009.

The US market has maintained its upward bias longer than its European and Chinese counterparts, due in large part to government intervention in the form of quantitative easing (QE) programs. The QE2 program that was implemented in late 2010 engendered a speculative unsustainable advance in equities from August 2010 until February 2011, but once that stimulus injection was fully priced into the stock market, the rally stalled along with the economy, as expected. Following the violent decline in July and August, the S&P 500 index is two technical breakdowns away from joining European and Chinese indices in confirmed long-term downtrends, so it will be important to monitor US market behavior closely during the next several weeks.