Since early June, we have been monitoring developing weakness in the historic stock market bubble that suggested the bull market from 2009 was becoming susceptible to a long-term reversal. In early August, the Dow Jones Industrial Average (DJIA) experienced a confirmed long-term breakdown when it moved below support at its 200-day moving average. Last week, the S&P 500 index followed suit and experienced a confirmed long-term breakdown as well. Since moving below its 200-day moving average on August 20, the S&P 500 index has declined 9%. Although the violent nature of the move during the past 3 sessions has left many commentators in the financial media perplexed, this type of behavior is fairly typical from a historical perspective when a highly speculative bubble experiences a confirmed breakdown.
Moving out to the intermediate-term view on the weekly chart, the S&P 500 index has now retraced all of the gains since October. There is no meaningful long-term support below current levels until the 200-week moving average at 1,708, so it is highly likely that the developing correction will test that support level.
We note often that a long-term top is a process, not an event. Now that the massive distribution pattern on the S&P 500 index has experienced a confirmed long-term breakdown, it is highly likely that the cyclical bull market from 2009 has terminated. Given that the current bubble in stocks is one of the largest and most speculative of the past 100 years, the developing cyclical bear will be extremely violent by historical standards and the S&P 500 index will likely decline from 40% to 60% by the time the next cyclical bottom forms. Additionally, price behavior will be characterized by wild, extreme moves in both directions much more than it has been during the past several years as the new cyclical bear purges the speculative excesses from the market.