Stock Market Rising Wedge Breaks Down

| July 24, 2012

At the beginning of July, we noted that the rebound off of the low in early June had developed into a rising wedge, which is a bearish technical formation that usually terminates with a break below uptrend support. Today, the S&P 500 index closed moderately lower, breaking well below the lower boundary of the rising wedge formation.

From an intermediate-term perspective, the decline this week has created a potential cycle high signal that would indicate the intermediate-term cycle high (ITCH) of the cycle from early June formed last week. As always, only the close matters, so a weekly close well below 1,345 on Friday would be required to generate this intermediate-term signal.

The elevated volatility that has characterized short-term market behavior during the last three months continues to drive violent daily moves in both directions, but the big picture urges extreme caution. Since the breakdown in early April, the stock market has exhibited behavior consistent with the development of a long-term top, so it remains likely that a new cyclical bear market has begun. As we often note, the formation of a long-term inflection point is confirmed in stages. The next technical breakdown that would further support the development of a cyclical top in April could occur during the next few weeks, so it will be important to continue monitoring market behavior closely.

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Category: Commentary, Market Update

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