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Stock Market Cyclical Bull Rebounds Off Of Critical Long-Term Support

Published 07/14/2015, 12:15 AM
Updated 07/09/2023, 06:31 AM

We have been monitoring developing weakness in the historic stock market bubble that has suggested the bull market from 2009 is becoming susceptible to a long-term reversal. The short-term breakdown in early June was followed by a quick move down to long-term support at the 200-day moving average in late June, and that critical support level was tested last week before the S&P 500 index rebounded sharply during the past two sessions. Technical indicators are now effectively neutral overall on the daily chart, suggesting that short-term direction is in question.

SPX Daily Chart

However, the magnitude and duration of the alpha phase decline that occurred from late June until early July continues to signal the likely transition to a bearish translation, so the most likely scenario with respect to the second half of the current cycle is a weak beta phase rally that fails to move above the alpha high (AH) in June, followed by a move below the last BL during the beta phase decline.

SP500 CA Bearish Scenario

Alternatively, an extended beta phase rally that moves up to a marginal new long-term high for the cyclical bull market followed by a shallow decline into the next short-term cycle low (STCL) would suggest that cycle translation is in question.

SP500 CA Bullish Scenario

It is important to note that these violent moves in both directions, which have been occurring on a regular basis for the past year, are signs of distribution and speculative exhaustion. They are absolutely not signs of a healthy uptrend.

SP500 Speculative Exhaustion

The weakness in market internal data, such as breadth and volume, has developed in tandem with this distribution pattern, increasing the likelihood that we are in the early stages of a cyclical top formation. Of course, the formation of a cyclical top is an extended process that usually takes six to twelve months to complete, so it is much too early to draw any conclusions from a long-term perspective. The next test of bull market health will occur during the beta phase of the current short-term cycle. If the S&P 500 index tracks the bearish short-term scenario outlined above, resulting in a confirmed break below the 200-day moving average, the long-term topping scenario will become more likely, so it will be important to monitor market behavior closely during the next three weeks.

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