We’ve seen this before – a market break that was out of synch with where significant intermediate tops should have been, time wise. The last time it happened was March of 2020. It doesn’t guarantee a similar outcome here, but there are keys to watch to tell us just how bad this turn will be. Is it another BTFD opportunity, or the beginning of a crash, or a terrible, multi-year bear market?
If you follow the monetary trends data on Liquidity Trader, you know that the current situation is more fraught with risk than any we have seen since the Yellen Fed Balance Sheet Normalization period of October 2017 to December 2019. In fact, the liquidity outlook is even more bearish now than then, so I take these technical signs of weakness in the market here very seriously, despite the fact that they appear to be out of synch with where the biggest swing cycles say the market should be.
Cycles – Both the 10-12 month and 6 month cycle up phases were truncated early. When such failures have happened in recent years, the up phases have usually reasserted themselves within a few weeks. But that wasn’t the case in March 2020. Because liquidity factors are about to turn extremely bearish I take this turn seriously. True, it may be a false alarm. But it seems more likely to be a warning shot across the bow, or something far worse.
The 13 week cycle down phase came on schedule, but it was sharper than it should have been with the 6 month and 10-12 month cycles both in up phases. The market would need to bounce hard this week, in an overdue 4 week cycle uptick, for this to turn into a benign consolidation. A weak uptick this week, or no uptick, followed by a break of trend support around xxxx (subscriber version) would suggest that something big to the downside was under way.
On the Third Rail Chart, the market needs to clear a downtrend line that runs from xxxx to xxxxx (subscriber version) this week to signal a short term rally. Conversely, dropping below xxxx would suggest a move back to the October low around 4300.
On the weekly chart, 3-4 year cycle momentum has formed a sharp negative divergence at the price highs, which is now confirmed by a price trend break. This suggests a 3-4 year cycle top is finally in progress. Tops on this cycle normally take 10-12 months to develop with a series of rallies and declines, with multiple peaks ultimately failing to surpass a previous high. An instant crash such as in March 2020 is the exception.
Another sign of possible top formation is the renewed failure of the long term trend resistance breakout, and the break of an uptrend line dating to March 2020.
The monthly chart now shows the conditions suggesting the formation of a 7 year cycle top. If the S&P ends December below xxxx (subscriber version), the uptrend would be broken, and the target would then be the trendline now at xxxx. Conversely, if that area remains intact, the way would be clear for a move to xxxxxxx xxxxx in early 2022.
Cycle screening measures The aggregate indicator fell to its lowest level since October 2020, low enough to suggest that a significant short term bottom is imminent. Therefore the odds favor a bounce from here.
Six month cycle measures weakened. Six month cycle current status broke down from neutral. That’s bearish. A weak bounce from around these levels would suggest x xxxx xxxxxxxx xxxxxxxxxx xxxxx (subscriber version).
These reports are not investment advice. They are for informational purposes, intended for an audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance.