At the time, we postulated that (1) an MDD the day after a new high in $SPX portends further downside, and (2) that a cluster of MDDs would indicate sellers are in control and lower prices will prevail. Sure enough, yesterday a second MDD hit the market that knocked out all the gains in the indices from over the past month.
Today, all 4 US indices and 6 of 6 cyclical SPX sectors are below their 20-dma. Watch the slope of those averages; the rest of the world has led the US markets, and their averages are now down sloping (see first chart, below). The US appears to be in the process of resynchronizing with those markets (second chart).
For at least the short term, sellers are in control of the market, and will remain so until one or both of the following transpire:
- US indices and a majority of the 6 cyclical sectors on the SPX regain their upward sloping 13-ema (or 20-dma), showing that the trend remains higher and is being led by economically sensitive stocks.
- Breadth swings forcefully in favor of bulls. In the third chart below, you can see that in the past, following a cluster of MDDs (red bars, bottom panel), the rebound only took hold when up volume exceeded 90% - a major accumulation day (MAD; middle panel with the green bars). Strong positive breath pushes a large number of stocks higher. With some follow through, $NYMO will also turn positive and $NYSI will regain its positive slope. An intervening distribution day obviously puts the ball back with the sellers (see May-June 2010).
The rest of the world has led the US markets, and their averages are now down sloping (yellow highlights).
The US appears to be in the process of resynchronizing with those markets; some cyclical averages are just changing to down slopes.
Breadth needs to swing forcefully in favor of the bulls. The chart below compares SPX with major accumulation days (green bars) and distribution days (red bars). Following a downtrend marked by high sell volume, look for a 90% up day to show buyers are in control.