Thoughts for Sunday, May 27...

I have been discussing the possibility of that the S&P 500 has reached a position where we have a high probability of a top. We have a five wave structure up from October 2005. We have a five-wave structure up from March 14. We have a large amount of proportionality between all of the waves. We have experienced a throw-over above the upper trend-line of the trend channel. All of these add to my suspicion that we are nearing an important top.

Another factor that adds to my suspicion is volume. I use a 10-day moving average to track recent volume trends, and to let me know if recent volume was relatively strong or relatively weak. Our recent volume trend peaked out with the highs of February. At that point the 10-day moving average was around 2.05 billion shares. Our highest intraday point came on May 23. By that point, our 10-day moving average had declined to 1.80 billion shares. This point adds to our evidence that the rally on the S&P 500 has lost its steam.

By the same token, our decline on Thursday was not accompanied by strong volume. As the chart above illustrates, the 10-day moving average was at 1.71 billion shares but the volume for that day was 1.33 billion shares. If the price movement on Thursday was a significant change in trend, then we would have preferred to see volume greater than our 10-day moving average. This tells us that volume did not confirm our downtrend, and suggests that we remain cautious in our bearishness.

There are some other tools suggesting that we are in the process of reaching a top. I have offered the Relative Strength Indicator as an example of a momentum oscillator that is not confirming our recent highs. Above is a chart with a 20-day Momentum oscillator, a 60-day Commodity Channel Index, a 14-day Relative Strength Indicator,and an Ultimate Oscillator. I used a few different time frames to show how prevalent the divergences are from many different perspectives. On each of these, you can see that the oscillators are not making new highs to confirm the recent highs. This suggests that the market has become technically weak.

I also wanted to add another point to my comments on Thursday night. During that post, I speculated that a corrective formation on the S&P 500 would take us down to around 1375. The chart above shows the 50-week simple moving average. As you can see from this chart, it has acted as significant support at several points since 2004. I think it is interesting to note that the 50-week moving average is currently at 1380.54. So, there is some evidence that there is important long-term support around 1375 on the S&P 500.