Bloodbath Bound ~ The Risk Averse Alert

Wednesday, October 24, 2012

Bloodbath Bound

Several months ago I contrasted the S&P 500's coincident momentum during its advance off October 2011 bottom to the same during its advance off late-June 2010 bottom to highlight a suspect technical backdrop underlying the market's advance over the past year whose extraordinarily imbalanced beginning last October ("God save our sinking ship!") has seen its momentum generally fade ever since, this while the S&P 500 further extends its levitation.

The negative outlook this contrast justified never diminished, and in fact is becoming more burdensome in the face of accumulated technical weakness evidenced over the past few years exposed in the light of circumstantial similarities presently appearing as the S&P 500 tops and prepares to turn over...


MACD (bottom panel) diving to the negative today takes us back to the late-May 2011 period for a similar setup leading to the same. Then, too, the S&P 500's 50-day moving average was being challenged, while momentum, already weakening, was on track to worsen relative to March 2011 bottom. Presently, momentum's further decline is a matter of anticipation already on our radar, as MACD's early-June 2012 bottom is thought likely to be taken out during the S&P 500's current iteration forming a top.

All this suggests additional, upcoming selling could find the S&P 500 imminently challenging its June 2012 low. Subsequent to this we should expect one final lift, a la June 2011, before the lug nuts fall off.

Per possibility an Elliott "rising wedge" is forming off October 2011 bottom, this could prove untrue for the S&P 500 should the index vacillate as anticipated here. I rather suspect, though, a "rising wedge" still will guide our view toward the NYSE Composite Index. The broad market continues holding up relatively well, while long-established leaders (S&P 500) presently receive the brunt of selling. This distinction probably will persist over coming days, only deepening index performance disparities already in evidence.

The one thing you might take away from the above view is a sense of prospective weakness in store on account of increasing vulnerability objectively displayed over time by every technical measure presented on the S&P 500's daily chart. There is a good case for fearing a bloodbath ahead.

Word on the Street
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