There isn’t a denying that the first pattern for the S&P 500 stays bullish as we push to the top of Q2 2024. However what in regards to the circumstances «below the hood» of the key benchmarks? In the present day, we’ll spotlight three «indicators of the bear» we’re searching for, of which two might have already triggered, and what kind of affirmation may point out a bearish reversal into the summer season.
The very first thing I’ve observed about main market tops is that we have a tendency to watch a proliferation of bearish momentum divergences. As costs push larger, we start to see weaker momentum readings utilizing an indicator like RSI. Let’s try how the current upswing for the S&P 500 has appeared from a momentum perspective.
Right here, we are able to see that the S&P 500’s RSI was round 70 when it first closed above 5300 in mid-Might, however solely round 65 on the current push above 5350. Larger highs on weaker momentum signifies a possible exhaustion of consumers, with much less emphasis on the newest upswing.
And it is not simply in regards to the S&P 500. Take a look at the day by day chart of Amazon.com (AMZN), for the same instance in mid-Might.
We will additionally see the bearish momentum divergence on shares within the industrial sector, akin to Northeast Ohio’s personal Eaton Corp. (ETN).
Whereas I’d say subsequent week is essential for the S&P 500, to see if there’s one other push above 5350 on stronger momentum, general, the transfer larger in June typically talking has been marked with decrease momentum readings.
These «indicators of the bear» are all half of a bigger listing that I name my Market Prime Guidelines, which is coming in tremendous useful proper about now! Need to observe alongside as we observe every of the gadgets on the guidelines to gauge a possible market high in the summertime? It’s worthwhile to be a Market Misbehavior premium member! Remember to make use of code STOCKCHARTS for 20% off your first 12 months!
One other signal of the bear that I would argue may be very a lot in play is a scarcity of affirmation from market breadth indicators. Here is a chart of the S&P 500 on a closing foundation, together with the cumulative advance-decline traces for the New York Inventory Change, S&P 500 large-caps, S&P 400 mid-caps, and S&P 600 small-caps.
Word that not solely are all 4 of these advance-decline traces sloping decrease over the past three weeks, however three of them completed this week under their 50-day transferring averages. When a market strikes larger, however breadth circumstances fail to substantiate these new highs, this implies slim management and potential toppy circumstances.
I do know what you are pondering: «However Dave, is not that simply because the Magnificent 7 shares are dominating once more?» And sure, you’d be appropriate. And whereas our main benchmarks can certainly transfer larger pushed by these mega-cap development shares, market historical past has proven {that a} wholesome bull market section tends to be marked by enhancing breadth readings. I would really feel far more optimistic about market circumstances if I noticed extra shares collaborating within the uptrend!
Now we come to the third signal of the bear, which is the breaking of «traces within the sand» for the key averages. Going again to our day by day S&P 500 chart, do you see the pink trendline utilizing the key lows since October 2023?
When you join the October 2023 low to the mid-April low round 4950, you will see that trendline connects nearly completely with subsequent lows in April and Might. So long as the S&P 500 stays above this trendline, then the first bull pattern would stay largely intact. But when and when the SPX fails to carry this trendline, and maybe if it might break under worth and transferring common help round 5200, then I’d strongly think about planning for a lot additional draw back for threat property.
In established bull market phases, senseless traders are likely to assume solely of potential upside, as they imagine the bull market won’t ever finish. Aware traders know that, by searching for indicators of a possible rotation, you may higher defend your earlier beneficial properties within the occasion of a draw back correction!
RR#6,
Dave
P.S. Able to improve your funding course of? Take a look at my free behavioral investing course!
David Keller, CMT
Chief Market Strategist
StockCharts.com
Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and methods ought to by no means be used with out first assessing your personal private and monetary state of affairs, or with out consulting a monetary skilled.
The creator doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the creator and don’t in any method characterize the views or opinions of every other particular person or entity.
David Keller, CMT is Chief Market Strategist at StockCharts.com, the place he helps traders decrease behavioral biases by means of technical evaluation. He’s a frequent host on StockCharts TV, and he relates mindfulness strategies to investor determination making in his weblog, The Aware Investor.
David can be President and Chief Strategist at Sierra Alpha Analysis LLC, a boutique funding analysis agency centered on managing threat by means of market consciousness. He combines the strengths of technical evaluation, behavioral finance, and information visualization to establish funding alternatives and enrich relationships between advisors and purchasers.
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