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While I was focused more on the shorter term technical wedge formation, I paid less attention the the more important downtrend line that is barreling down on price. Watch this video from INO.tv to follow along with this important analysis:
After today’s decline, we’ve broken to the downside, out of the lower trend line. Of course this could be a head fake but I don’t think so. Pretty every single measure of breadth, sentiment and technical indicator out there has been flashing a sell for a few weeks as the market ignored it and kept going up. It seems gravity finally caught up with price.
I don’t want to go over the many indicators we’ve already covered in the past few weeks so I’ll just briefly cover two. The first, the percentage of S&P 500 components that closed above their 50 day moving average has been not only extremely high, it has uncharacteristically stayed there for the past 30 days of trading. Today’s declines pushed it down from almost 90%.
Another specific indicator, the ISEE Sentiment index has been elevated sporadically since May 5th when it reached 225. Then on Friday (May 8th) it was 191 and on Monday 197. And more alarming, on a down day like today, when the S&P 500 and the Nasdaq ~3%, the ISEE was 179. That means even when we have a clear down trending day, retail option traders are still bullish enough to buy 179 calls for every 100 puts.
What we’ve been asking ourselves is whether this is a bear market rally or a nascent bull market. This is far more than a technical question to be answered for bragging rights. Fact is that distinguishing between the two allows us to calibrate the indicators that we look at. As I’ve mentioned before, breadth measures and sentiment act very differently during a bear market than during a new bull market.
For obvious reasons, there are precious few tools that this kind of guidance. The Coppock Curve, although not perfect, is one of them and by the end of the month we’ll have a better idea. For more information on this indicator, check out the previous link. The “line in the sand” is the 874 level for the S&P 500 index. If we can hold that by month’s end, even if we head lower, the Coppock Guide will have provided a signal.
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