LONGER-RANGE INDICATORS REMAIN BEARISH FOR U.S. STOCKS -- RETEST OF EARLY 2018 LOWS SHOULD DETERMINE IF STOCKS ARE IN A BEAR MARKET -- STOCKS OFF TO BAD DECEMBER START -- FAILURE OF SANTA CLAUS RALLY TO SHOW WOULD BE A BAD SIGN FOR THE NEW YEAR
WEEKLY S&P 500 CHART CONTINUES TO LOOK TOPPY... There's a reason why every short-term rally attempt over the past couple of months has failed. That's because longer-range indicators have turned bearish and remain so. It's more difficult for bounces on daily charts to get very far when the trends on weeklyand monthly charts have turned down. So we'll focus today on a couple of those longer-range charts. You've seen them before in previous messages since October. But they're worth another look to help keep things in perspective. We're going to focus on the S&P 500 Index today since it's the main benchmark for the U.S. stock market. Chart 1 plots weekly price bars for the SPX since the start of 2016 when the last upleg of its nearly ten-year bull market started. And the chart strongly suggests that the nearly three-year rally has ended. First of all, the rising trendine starting in early 2016 was broken during October. That previous support line has acted as a resistance line above short-term rallies since then. That's a negative sign. The SPX is now headed down for a retest of its early 2018 lows. That will be major test of the market's uptrend. Because a decisive close below that previous low would confirm that stocks are in the early stages of a bear market. In addition, the blue 10-week moving average crossed below the red 40-week average this month (called a "death cross") which is another bearish sign. [A TV anchor on FOX Business this week referred to the death cross as "gobbledygook", which says a lot about the quality of its reporting]. Even strongeer bearish signals are clearly seen on the weekly RSI and MACD lines. We'll talk about them in the next paragraph.
Chart 1
WEEKLY RSI AND MACD LINES REMAIN BEARISH ... Two things immediately jump out on the weekly RSI and MACD lines in Chart 1. Their third quarter peaks were much lower than their first quarter peaks while stock prices were hitting new highs (see arrows and trendlines). That major "negative divergence" was the first serious warning that the market uptrend was in trouble. Since then, both indicators have fallen below their early 2018 lows to turn their trends down. The two MACD lines turned bearish for the second time this year during October (from a lower level) and have fallen to the lowest level in nearly three years. And there's no sign of relief. That can be seen by the red histogram bars to the bottom right of the chart (red circle). Those histogram bars plot the difference between the two MACD lines. And there's no sign of them converging (the first necessary ingredient at a bottom). In fact, the last histogram bar fell to a new low this past week. That means there's probably more selling to come. The MACD monthly bars in Chart 2 have also turned negative. That carries a warning for the aging bull market which is in it tenth year and the longest in history.
Chart 2
BEARISH MONTHLY SIGNALS THREATEN MAJOR BULL MARKET ... While the weekly bars in Chart 1 show the nearly three-year uptrend since early 2016 in jeopardy, the monthly S&P 500 bars in Chart 2 suggest the nearly ten bull market that started in 2009 may also be peaking. The upper box shows the 14-month RSI line bottoming in 2009 in oversold territory below 30, and peaking in very overbought territory near 90 at the start of this year. Since then, the RSI line has fallen below a rising trendline drawn under its 2009/2016 lows and is bearing down on its previous low near 50. That will be an important test. But there's little doubt that the nine-year uptrend in the RSI line has been broken. The middle box shows the monthly MACD lines also turning negative. That's the third monthly sell signal since the bull market started in 2009 which is another sign that it may have peaked. That's because a bull market usually has three uplegs, and it's just completed the third one. Now for the monthly price bars themselves. To the upper right, you can the rising red trendline extending back to early 2016 already being broken. A close below its early 2018 low would signal a potential drop to its longer-range green trendline drawn under its 2009, 2011, and 2016 lows. A drop to that line (near 2300) would be a loss of approximately 20% from its recent high. That would be enough to qualify as a bear market. Needless to say, that will be an even bigger test if and when the S&P 500 gets to that lower trendline.
IF SANTA CLAUS SHOULD FAIL TO CALL, BEARS MAY COME TO BROAD AND WALL... December hasn't lived up to its reputation as the year's strongest month. Stocks have lost -5% since the start of the month, which the Wall Street Journal calls the worst December start since 1980. That suggests that the traditional Santa Claus rally could also be a disappointment this year. That wouldn't be a good sign. The Stock Trader's Almanac defines the Santa Claus rally as "short, sweet, respectable rally within the last five days of the year and the first two in January" with an average gain of 1.3%. It warns, however, that "Santa's failure to show tends to precede bear markets". That wouldn't make for a very happy new year. The above headline is taken from the Almanac.
