FRIDAY'S REBOUND PREVENTS FURTHER STOCK DAMAGE -- BUT WEEKLY AND MONTHLY CHARTS ARE SENDING MORE SERIOUS WARNING SIGNS -- ELLIOTT WAVE ANALYSIS ALSO SUGGESTS THAT THE MARKET MAY HAVE COMPLETED ITS NINE-YEAR RUN -- BULL MARKETS MAY NOT DIE OF OLD AGE

S&P 500 HOLDS 200-DAY AVERAGE ... A stock rebound on Friday prevented a more serious market breakdown. That's because it allowed the S&P 500, and some other market gauges, to hold at or above their 200-day moving averages (Chart 1). That included the Dow and the Nasdaq, as well as consumer discretionary and technology ETFs that have had a bad month. But there was more serious chart damage elsewhere. Small and midcap stock indexes ended the week well below their 200-day lines, as did ETFs that track real estate, communications, industrials, materials, and financial stocks. The 14-day RSI line (top box) fell below 30 to the deepest oversold level of year which probably contributed to Friday's relief rebound. MACD lines, however, fell to the lowest level since April and remain very negative (lower box). That may not be enough to prevent a further short-term rebound. A look at longer range charts of those same indicators, however, suggest that this week's stock selloff may carry a more serious warning.

Chart 1

WEEKLY CHART LOOKS TOPPY... The weekly bars of the S&P 500 in Chart 2 paint a more negative view of the stock market. The top box shows the recent peak in the 14-week RSI line ending well below its higher peak reached at the start of the year. To a chartist, that's a serious "negative divergence" and warns of a potential market top. So do the two weekly MACD lines in the second box which show a similar negative divergence. The two weekly MACD lines also turned negative this week for the first time since the spring. What makes those two negative divergences even more serious is that they're occurring in the fifth wave of the market rally that started at the beginning of 2016. According to Elliott Wave analysis, market rallies normally take place in five waves. That includes three upwaves (1,3,5) and two intervening corrections (waves 2 and 4). The red numerals in Chart 2 suggest to me that the five-wave advance since the start of 2016 has probably been completed. Negative divergences in a fifth wave carry more serious warnings. Notice the triangle wave 4 that's identified by two red converging trendlines that formed during the first half of this year. Since triangles are normally fourth waves, that increases the odds that the last upleg that started this spring may be the fifth and final wave of the two-year rally. To put that in a longer-term perspective, I refer back to a February 21 message I wrote on that subject. That earlier message is repeated below with its accompanying Elliott Wave chart interpretation.

Chart 2

FEBRUARY 21: STOCKS MAY BE IN FOURTH WAVE CONSOLIDATION PATTERN... My message from January 6 expressed concern about the fact that the S&P 500 was well into its fifth Elliott Wave advance that started in March 2009 (more on that shortly). The red box in Chart 3 shows the last serious market correction that lasted from August 2015 to February 2016. My August 22 message from that year carried the headline: "Stocks Have Entered a Wave 4 Correction". That meant that the market still had another upwave to go before completing a five-wave bull market sequence. That final upwave should itself form five waves. The blue numerals in Chart 3 show my interpretation of that advance since the early 2016 bottom. And it looks incomplete. Waves 1 and 2 during the second half of 2016 look pretty clear. The third wave, however, that lasted from November 2016 to this January was absent any notable correction or consolidation. So I'm defining that as a long wave 3. If I'm right, that would make the current market weakness a wave 4. The fact that the February correction bounced off its major up trendline appears to support that view. What does that mean? Wave 4 consolidation patterns are often "triangular" in shape. That would suggest the market trending sideways between its recent highs and lows for several weeks or months (the last correction lasted three months). That could pave the way for another fifth (and possible final) upwave. There's good and bad news in that analysis. The good news is that the bull market probably isn't over. The bad news is that the next upleg (if and when it occurs) could be the last one in a bull market nearing its ninth anniversary in March. [Written on February 21].

Chart 3

JANUARY 6 HEADLINE: S&P 500 IS IN ITS FIFTH ELLIOTT WAVE ... Since the February 21 message referred back to an even earlier January 6 article, I'm repeating that earlier headline here along with its accompanying chart. The blue numerals in Chart 4 show my interpretation (at the start of year) of the current bull market that started in March 2009 (through the end of 2017). The blue circle shows that the 2015 correction represented a likely fourth wave correction in a five wave advance. And that the rally since the start of 2016 may represent the fifth and final wave of the major bull market that began more than nine years ago. And as Chart 2 further suggests, that fifth wave advance that started more than two years ago may have also run its course. In Elliott Wave parlance, that means the possible end of the fifth wave of a fifth wave. That's usually a bad combination. If my interpretation of the Elliott Waves is correct, that would suggest that the longest bull market in history is probably ending. [Chart 4 is dated January 5, 2018].

Chart 4

EVEN BULLS CAN EVENTUALLY DIE OF OLD AGE... Whenever anyone points out that the current bull market in stocks is in its tenth year and the longest in history, the response I keep hearing is that bull markets don't die of old age. Well, that's partially true. Nothing actually dies of old age. Old age just increases the odds of dying. If there's no illness or accident involved, the reason usually given for a death is "natural causes". But even that catchall phrase implies some causality. And age does matter. Let's compare the number of years in a stock rally to the decades in a person's life. And let's assume that the stock market caught a bad cold this past week. Maybe even a mild case of pneumonia. For someone in their earlier decades of life, that's no big deal. For a person in their tenth decade, however, a cold is a big deal (while pneumonia can be a killer). The main point being that most things become more vulnerable to setbacks as they age. And they don't recover as fast. That's why I believe that sudden market drops like the one we had this week get more dangerous as the bull market ages. The stock market uptrend is in its tenth year. And no bull market has ever lasted more than ten years. Maybe it's just me, but I don't find that very encouraging.

I also keep hearing that stocks have to continue rising because the economy remains strong. I've heard that at every market top in the last fifty years. But history doesn't support that argument. Stocks always turn down before the economy. That's why stock prices are included as one of the leading indicators of the economy. Speaking of old age, the current U.S. economic expansion is the second oldest in history and is within a year of becoming the oldest. That's also pretty long in the tooth which increases the odds of bad economic things happening. Like bond yields and mortgage rates reaching a seven-year high, while homebuilding stocks are tumbling. And a Fed that's reversing a decade of record low interest rates and an unprecedented period of financial repression. Which by the way has never been attempted before. There's no historical precedent for global central bankers unwinding years of quantitative easing. Yet financial experts keep reassuring us that one of the oldest economic expansions in history is going to keep an even older stock market rally alive. While gauges of foreign stocks are falling to the lowest level in a year as trade tension rise. And all that is happening while economic old age increases the odds of things going wrong. When old folks fall, they don't bounce back as much or as fast they used to. I know from experience. And it usually hurts a lot more.

I was told several times this past week that the stock selling was mostly "technical" while the "fundamentals" remain strong. [What exactly is technical selling? I've never seen a sell order with the word "technical" on it]. History does show, however, that technicals usually turn bad before fundamentals. That's because stock prices are a discounting mechanism. And that discounting is usually reflected first in falling stock prices (especially when bond yields rise). That's why growth stocks were hit so hard. It's also not a good sign when stocks fall on good news. Big banks reported double digit earnings gains for the last quarter on Friday, after which an index of bank stocks fell to the lowest level of the year. Must be those chartists again. Speaking of bad technicals, the monthly bars in Chart 5 show the 14-month RSI line for the S&P 500 starting to roll over from overbought territory over 70. Its second peak this year is also much lower than its early 2018 peak (blue arrow). That shows loss of upside momentum in the market's long term uptrend, and appears to confirm similar negative divergences on weekly charts (not to mention the fact that the number five keeps showing up on my charts). This is a bad time for the oldest bull market in history to catch a cold.

Chart 5