More Warning Signs for Bulls

On Tuesday, I outlined some of the reasons why I felt the market was undergoing a fundamental change of character, and discussed why I believed the power had shifted to the bears.  Since then, even more warning signs have cropped up for bulls.

The most obvious is the fact that most indices have now broken their intermediate uptrends.  Additionally, the decline in the S&P 500 (SPX) appears to be a five wave impulsive move, which suggests that the trend has shifted, and the next highest degree trend is now pointed down.  Whenever we see a new five wave leg forming in the opposite direction of the prior move, we can generally anticipate this first leg will be followed by at least one more leg of similar length, or longer.  There are other warning signs as well.

The chart below shows the 5, 10, and 20 day exponential moving averages of SPX and the Dow Transportation Average (TRAN).  This is based on a trend-following system which was popularized by Gerald Appel, who rose to stardom by developing the now-ubiquitous MACD indicator.  Okay, maybe "stardom" isn't the right word, since us traders belong to a pretty specialized subculture -- it's probably unlikely that your barber or landscaper has posters of Gerald Appel hanging in the garage, and I doubt he's ever hounded by paparazzi.  

Anyway, the last signal from this indicator was a buy, back in November 2012.  As we can see on the chart, TRAN has already given bearish crosses, and SPX is now extremely close to joining in.  Of course, there are no "magic bullet" indicators, and this one can be prone to whipsaws around tops, which is another reason I use multiple indicators and charting systems.  Nevertheless, this is one more potential red flag in the making for intermediate traders of the bullish persuasion.
  

  
The short-term wave structure in SPX is open to a few different interpretations, but I'm presently inclined to favor a path similar to the one shown below.  We'll have to see what today's session brings, but I suspect we'll see a green close today.

Tuesday's "best guess" projected path has since tracked nearly perfectly, but as mentioned above, I'm not certain if it will continue to do so.  I have left it unchanged on the chart below, but right at this exact moment I don't necessarily feel that I can see two turns down the road for the market.  I do somewhat prefer the path outlined above, which would see a rally for today, then a decline into Monday, then a bounce for Turnaround Tuesday.  Let's get through today's session first, then we'll take another look at the near-term path in Monday's update.

Do note that the red iii/C is not presently intended as a "final target," it's merely a general outline of expected direction at this stage.  Note that the trend line off the November lows has been broken for the first time since then.

 

In conclusion, the market has not only fulfilled Tuesday's predictions, but also added confidence to Tuesday's bigger-picture thesis that the larger trend has shifted into the bears' favor.  Over the near-term, this would be a great spot for a bounce -- but the near-term trend is still solidly down, so while both charts depict a bounce developing here, that bounce isn't a foregone conclusion yet.  In either case, I believe further downside awaits before the market reaches a more significant bottom.  And while intermediate targets would only be guesswork at this point, the ultimate downside potential is considerable.  Trade safe.

 

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