Topped out...

The S&P 500 closed today below its closing price on Friday. I think that this is an important event for the short-term picture of the broader stock market. It is important because the lower close completed what might have been a corrective wave up.

If you will forgive the incorrect nomenclature in terms of degree, you will see that since the lows of March 14 the S&P 500 has completed two five-wave formations higher. Elliott stated that waves in such formations cannot extend. This suggests that if this upward movement was corrective in nature, then that wave must be complete. That would suggest the stock market will head down toward its March lows.

We can find support for the notion that this index is at or near a top by taking a look at the breadth and volume of the S&P 500 over the last three weeks. The chart above illustrates two points. The first is that even as the S&P 500 rallied to new highs, the number of stocks participating in that rally declined. The second is that the number of shares traded as these new highs increased began to decrease, quite dramatically in the last week. Both of these points suggest that the recent rally in stock prices was technically weak.

(My thanks to PARL for his discussions on the weakness in the McClellan Oscillator.)