headed for trouble

Here are three charts which tell me that the technical condition of the US stock market is weakening and that a drop of at least 10% will start within a few weeks from somewhat higher prices than currently prevail.

The two bottom charts both say that the best part of the rally from the November 2012 low point is behind us. The bottom chart shows the 20 day moving average of the number of stocks in the S&P 500 which are trading above their own 50 day moving averages. You can see that this indicator recently reached levels from which extended down moves have begun during the past 4 years. Normally the S&P 500 continues to rally for a number of weeks even as this 20 day moving average declines so this tells us that the top of the market probably still lies ahead of us.

The middle chart tells a similar story. It shows the 20 day moving average of the daily count of the number of issues on the NYSE making 12 month highs. Normally this moving average starts declining well in advance of important tops. I think it has made its high, probably for the current bull market, but the top in the averages is almost certainly at least several weeks ahead of us.

The top chart is a daily chart of the Dow Industrials. On this chart I have illustrated two methods for trying to anticipate the stopping points of market swings.The blue rectangles show that the rally in the Dow from its November 2012 low has now matched the size of the June-September 2012 rally. The red arrows show that the Dow has exceeded its September 2012 top by an amount which equals the distance by which the May 2012 top exceeded the May 2011 top. Both calculations suggest that some sort of top in the Dow is at hand.

In my judgement any top in the Dow which develops over the next month or so will not be the top which ends the current bull market. The bottom two charts suggest that the big top is still months ahead of us and is not imminent.

Instead a top near current levels will probably produce a drop which carries the Dow below its November 2012  low and possibly below its June 2012 low. This would be a drop of 10-15%. However I think any such break will be brief, lasting only a few weeks at most, and will be followed by a rally to new bull market highs later this year.