When will the equity market run out of steam?

Everyone loves a good rally. Traders love it. Investors love it. Businesses love it. And of course politicians love it (well, at least the ones in power). But what happens when the market runs out of steam? We may find out quite soon!

Technical analysis is all about odds. What is the "most likely to happen" and "when?”

The market has been on a strong path higher over the past four months, and this trend has been a continuation of an even larger uptrend that has been in play in the major indexes since October 2011. And THAT uptrend has been a part of the monthly uptrend that we've seen hold since March 2009.

It's no wonder that few are looking back and the sky seems to be the limit. Funny thing though: I seem to remember the same thing back in 1999... and again in 2007.

So when I once again start to see exhaustion patterns begin to develop in the S&P 500 and Nasdaq Composite like I did back then (albeit different exhaustion patterns), I start to get leery.

To start with, that trend we've been following since 2009 kicked off its third wave of upside on the monthly time frame in October 2011. Since the corrective phases between each of those upside waves was comparable in time development, that means that the odds of getting a fourth wave without a larger trend correction on that time frame are not particularly strong.

To make things even more difficult for the long-term bulls, this third wave of buying that began in 2011 has three legs up in it as well, but the final two were stunted compared to the first. Despite the strong momentum, they established only slightly higher highs with each push of buying. This created a momentum shift that is transected in blue in the charts below and annotated in green. This is yet another sign of trend exhaustion. Currently the market is testing the zone of upper price channel resistance created by this trend.

Still not convinced? Let's look at some other factors affecting the current trend.

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