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Death Crosses Flashed; Bear Market Confirmed

Despite the potential for near-term rallies, stocks show few signs of technical strength


The month of September is traditionally the worst month of the year for stocks. But in just two days, the market fell 3.77%, marking this September as its worst start since 1974, according to The Wall Street Journal.

The recent behavior of the market is in stark contrast with accepted trading theories that assume that the market has an upside bias at the end of each month and the beginning of a new month due to inflows of large deposits from IRA and 401(k) plans. But as Sy Harding of StreetSmartPost points out, this theory holds water only in bull markets and is “not reliable in serious corrections and disappears altogether in bear markets.”

The recent trigger for the selling, of course, was Friday’s jobs report that showed no jobs created in the month of August, with June and July reports revised lower. The August unemployment rate was reported as 9.1%, unchanged from July.

SPX Chart

Trade of the Day Chart Key

The technical position of the market prior to the jobs report was weak. The neckline break at 1,260 led to a sell-off that dropped the S&P 500 back to the top of last summer’s trading range at 1,100. All of August was spent in a rebound and consolidation that now appears to be a bear market flag with its low at 1,100 and high at Thursday’s reversal point at 1,230. Flags usually point in the opposite direction of their final break. In other words, upward pointing flags like this one usually break lower. Initial support for a lower break would likely result in a fall to last summer’s trading range at 1,040 to 1,100.

As we enter September, there have been few positive changes in the economic and political arenas of Europe and America, and the same old technical problems seem to haunt the bulls: The market has turned down from the enormous resistance formed over a seven-month period with a bearish daily reversal from the Dow Jones Industrial Average, and the S&P 500 is in the process of forming what appears to be bearish flag. And as previously noted, the Dow Theory has confirmed a bear market, all major indices have flashed a death cross.

The financial press continues to ask, what the Fed’s next move is and whether they embark on QE3? And if they do, will the market rally or interpret further stimulus as a sign of economic weakness?

As technicians, it is not our task to answer these questions but to study and interpret what is technically clear, and it is this: Despite the potential for near-term rallies, stocks show few signs of technical strength, thus the conclusion is that the overall trend is down.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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Article printed from InvestorPlace Media,

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