The deterioration of the indicators highlighted below point to a downside break for the late-stage cyclical bull market from 2009, according to BofAML. Should 1,867 decisively give way, the 1820 (October 2014 low) provides additional support but the bigger risk is a top that projects down to 1,600-1,575; and derspite the last 2 days' bounce, volume and breadth suggest a market under distribution or selling pressure, not primed for new highs.
Many indicators have rolled over in advance of price
- New year-long+ lows for S&P 500 on-balance-volume
- S&P 500 VIGOR is breaking the October 2015/October 2014 lows
- The US Most Active advance-decline line has completed a top. Similar tops precede/coincided with S&P 500 breakdowns in late 2007 and 2000.
- Weekly global index-level advance-decline lines continue to hit new lows
- A Dow Theory Sell Signal in late August. However, the Industrials are still above their August low in early 2016 (as of Jan 19) and not confirming downside in Transports yet.
- Monthly MACD sell signal with the S&P 500 back below its 12-month MA near 2042. -The first weekly MACD sell signal below zero since 2008 in early January
- A rise off extreme lows for net free credit (free credit balances in cash and margin accounts net of the debit balance in margin accounts) could exacerbate an equity market sell-off.
S&P 500 at risk for breakdown below 1867 toward 1600-1575
We are monitoring three supports on the weekly S&P 500 chart: the uptrend line from 2009 near 1900, the neckline of a potential 1-year+ top near 1890, and the August low of 1867.
As of Jan 19, the S&P 500 has not yet decisively broken this 1900-1867 support zone, but 1867 remains at risk for a downside break given the deterioration of the indicators continue to point to a late-stage cyclical bull market from 2009. Should 1867 decisively give way, the 1820 (October 2014 low) provides additional support but the bigger risk is for a 1-year+ top that projects down to 1600-1575. Holding resistances at 1950 and 1994-2023 on oversold rallies keeps the risk to the downside.
Head & shoulders top breakdown for the broad-based Value Line Arithmetic
The Value Line Arithmetic Index (VALUA) is a broad-based, equal weighted US equity market index of approximately 1700 stocks.
The VALUA broke down from a 2-year head and shoulders top. Sustaining the break below 4100-4200 keeps this bearish pattern intact and favors a deeper decline to 3250-3150 or the breakout point from late 2012/early 2013. Additional resistance comes in at 4240-4440.
Mid caps show a head & shoulders top & big relative breakdown vs. large
The S&P Midcap 400 shows a fairly well-defined head and shoulders top, completed on the break below the uptrend line from October 2014.
Initial support comes in at the October 2014 low near 1269 but the top pattern counts down to 1150-1135 and remains firmly in place as long as the S&P 400 remains below 1372-1427. The late 2012 breakout point near 1000 provides additional support. Mid caps broke major support at the relative lows from October 2014, August 2012, and October 2011. This points to a longer-term loss of leadership from mid caps.
Small caps continue their absolute & relative losing ways
The Russell 2000 remains under pressure. The loss of multi-year relative support at the October 2014 and October 2011 lows could confirm a secular loss of leadership from small caps.
The Russell 2000 has also broken below its October 2014 low near 1040. There are some supports below this level, such as the 1010-1000 and 953-942 areas, but the most significant support comes in at the late 2012/early 2013 breakout point near 868-846. Given the major technical deterioration of small caps, we are not ruling out a test of that breakout point.
S&P 500 on-balance-volume continues to break down
The S&P 500 on-balance-volume (OBV), a measure of net accumulation, has lagged severely as volume did not confirm the May 2015 peak in the S&P 500. OBV has trended lower since late 2014 to suggest a lack of accumulation.
In fact, recent year-long+ new lows for S&P 500 OBV suggest a market under distribution or selling pressure. In our view, this increases the risk for the S&P 500 to follow the Value Line, S&P 400, and Russell 2000 and complete a year-long+ top on a break of the 2015 and late 2014 lows.
S&P 500 VIGOR: risk of top on break of Oct 2015 & Oct 2014 lows
S&P 500 VIGOR shows longer-term distribution (selling or down volume) dominating accumulation (buying or up volume) moving into early 2016.
This market has been under net distribution or selling. The break below the VIGOR lows from October 2015 and October 2014 confirms the weak readings for OBV as well as the risk for a deeper market correction below the S&P 500 lows from 2015 and late 2014.
Breadth Risk: A major breakdown for the US most active A-D line is bearish
The US 15 Most Active Advance-Decline (A-D) line is a daily cumulative A-D line of the top 15 most heavily traded stocks in the US by share volume.
When this A-D is rising, breadth for the most heavily traded stocks is bullish and reflects accumulation or buying. When this A-D line is falling, breadth for the most heavily traded stocks is bearish and reflects distribution or selling. The US most active A-D line topped out in advance of the S&P 500 with a peak in April and has since moved lower to complete a year-long top. This is a bearish signal for US equities in our view.
Similar Most active A-D line breakdown coincided with tops in 2000 & 2007
Big breakdowns in the most active A-D line preceded or coincided with big breakdowns for the S&P 500 in 2000 and 2007.
Moving into 2016, the Most Active A-D line has a big top breakdown in place and we view this as a risk to the cyclical bull market that began in 2009.