Index topping formation resolved, down volume expands

Speaking of windmills, there was the market itself. Ninth largest point drop in a single session last Thursday with the Dow 30 down 512.76 points, or 4.31% (1987 was the largest percentage decline at -22.61% and -508 points in the Dow). Big increase in downside volume to confirm the downward break from Head and Shoulders Top formations. Price weakness in all of the major indexes below 200-Day moving Averages. New Short-term lows in our Most Actives Advance/Decline Line (MAAD) and the Call/Put $Value Flow Line (CPFL). Dow Theory Sell confirmation via the Dow 30 and 20. Downside break by Cumulative Volume in the S&P 500 Cash Index and the S&P 500 Emini futures contract below long-term uptrends stretching back to March 2009. And another nail in the bull market coffin with a break by Emini CV below the March 2009 plot lows.

S & P 500 Index with Cumulative Volume

But there are still bulls out there, bless their hearts. And, admittedly, the long-term trend does remain positive, albeit substantially frayed. In fact, all of the major indexes stalled out on the downside in early session weakness Friday after slightly penetrating defined Monthly Price Channels (only the Dow 30 fell short by a bit) to suggest that in the face of deeply "Oversold" short-term conditions, some bargain-hunting and/or short-covering could develop in the sessions just ahead. In fact, we suggested that possibility after Thursday’s losses via our brief comments Friday morning when the market stabilized and improved somewhat relative to the day’s lows over the remainder of the session. Index prices are also in the vicinity of long-term support coincident with the April 2010 price highs where S&P Cumulative Volume made a plot high that was never exceeded by subsequent CV action.

S & P 500 Emini Futures contract with Cumulative Volume

But it’s not the short-term term trend that is now the issue. Nor the Intermediate. It’s the Major Cycle that is under a very big spotlight. Huge. Is the 14.7% loss in the S&P since its May 2 high (1370.58) through last Friday’s intraday low (1168.09) the extent of the decline? Or not? Maybe and maybe. The bigger answer to that question will be the extent of the rebound relative to the Neckline of the H&S Top (near 1260--S&P) that was fractured last week. When it develops, such a return move would be classic and so would an ensuing failure. What we want to know is how volume performs on an upmove from here. Best guess? It fails miserably and, as prices turn lower once again, CV makes new lows before prices. That action would imply more distribution by the Smart Money crowd as reflected in MAAD and then a move to new lows by the indexes. As a return action rally inevitably unfolds, there is also the perennial truth that we are approaching that time of the year which has been coincident with some special market moments – 1929, 1987, 2007.

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