A New Signal for Next Great Decline in Stocks

It's getting a bit tiring, waiting for the great decline that never comes. But it will.

 

There's a long list of reasons why. And I've gone over many of them in previous essays...

 

Technical indicators have rolled over and generated intermediate-term sell signals. The major market indexes have broken down from bearish rising-wedge formations. Insider selling is at the highest level since October 2007. And investor sentiment, a contrary indicator, is off the charts.

 

But the market hasn't broken down. Not yet, anyway. Oh sure, the S&P 500 has pulled back a bit after topping out at 930 three weeks ago. But a 3% decline following a 36% rally is a freckle on the market's bullish complexion.

 

It's taken longer than I thought. But by the look of the following chart, the drop will happen soon...

 

 

This is an updated chart of the S&P 500. You can see how it broke the bearish rising wedge (in blue) to the downside and how it has been bouncing back and forth between support and resistance (in red) ever since.

 

Notice, however, the chart on the bottom. This displays Bollinger Band width. Bollinger Bands are used to compare volatility and relative price levels. In short, a large distance between the Bollinger Bands indicates high volatility. A narrow distance indicates low volatility.

 

Since volatility is cyclical – meaning periods of high volatility are followed by periods of low volatility and vice versa – narrow Bollinger Band width often precedes big moves in the market.

 

Today, the width is about as narrow as it has been at any other time during the past year. The market is storing up energy for its next big move. Given the numerous bearish technical indicators, my bet is that move will be to the downside.

 

My downside target for the S&P 500 remains about 800. We'll know stocks are headed there once the index breaks through support at about 875, and once the Bollinger Band width chart turns up and starts to move higher.

 

Best regards and good trading,

 

Jeff Clark

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