Stock Market Cyclical Bull Rebounds Off Of Critical Long-Term Support
Erik McCurdy | Jul 14, 2015 12:15AM ET
We have been monitoring developing weakness in the historic stock market bubble that has suggested the bull market from 2009 is becoming susceptible to a long-term reversal. The short-term breakdown in early June was followed by a quick move down to long-term support at the 200-day moving average in late June, and that critical support level was tested last week before the S&P 500 index rebounded sharply during the past two sessions. Technical indicators are now effectively neutral overall on the daily chart, suggesting that short-term direction is in question.
However, the magnitude and duration of the alpha phase decline that occurred from late June until early July continues to signal the likely transition to a bearish translation, so the most likely scenario with respect to the second half of the current cycle is a weak beta phase rally that fails to move above the alpha high (AH) in June, followed by a move below the last BL during the beta phase decline.
Alternatively, an extended beta phase rally that moves up to a marginal new long-term high for the cyclical bull market followed by a shallow decline into the next short-term cycle low (STCL) would suggest that cycle translation is in question.
It is important to note that these violent moves in both directions, which have been occurring on a regular basis for the past year, are signs of distribution and speculative exhaustion. They are absolutely not signs of a healthy uptrend.
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The weakness in market internal data, such as breadth and volume, has developed in tandem with this distribution pattern, increasing the likelihood that we are in the early stages of a cyclical top formation. Of course, the formation of a cyclical top is an extended process that usually takes six to twelve months to complete, so it is much too early to draw any conclusions from a long-term perspective. The next test of bull market health will occur during the beta phase of the current short-term cycle. If the S&P 500 index tracks the bearish short-term scenario outlined above, resulting in a confirmed break below the 200-day moving average, the long-term topping scenario will become more likely, so it will be important to monitor market behavior closely during the next three weeks.
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