Is A Stock Market Plunge Coming Soon?

In our article July 13^th, 2014 we warned that a “significant decline is coming to the stock market.” In that article we presented evidence of several Bearish divergences we were tracking between prices and key indicators for our subscribers at A Significant Decline is Coming to the Stock Market.

The Industrials topped on July 17^th at 17,151. Soon after that top, four days after our article was published here, the Industrials fell 818 points to 16,333 on Thursday, August 7^th. The S&P 500 topped on July 24^th at 1,991, and then fell 87 points to 1,904 on August 7^th, 2014.

Well, again we see new Bearish Divergences forming all over the place. This places us on high alert this weekend for another decline. Will it be a plunge? Let’s explore.

Our key trend-finder indicators, the combination of the Purchasing Power Indicator, the 30 day stochastic, and the 14 day stochastic, are designed such that when their individual signals are all in agreement, then the market has triggered a short-term investing/trading signal. These are momentum indicators. The theory here is that an object in motion tends to stay in motion, and in the case of the stock or precious metals markets, stay in the same direction. So, if we get a new Sell signal in these three individual indicators, then the key trend-finder indicator in its entirety becomes a Sell Signal. It means that market momentum to the downside is now strong, which means the odds of further decline are very high. That becomes an excellent place to enter a short trade, or buy an ETF that is short, or buy put options on the market.

Our key trend-finder indicators generated a new Sideways signal on September 2^nd, and have remained on a Sideways signal ever since. In other words our key trend-finder indicator was telling us that we were in a period of time where the stock market would lack a strong powerful tradable trend, and further, that the previous trend which had been a three week rally was pausing or ending. This guidance was terrific and that is exactly what has happened. Stocks have oscillated up and down for almost two weeks, a lousy trading environment. In our Platinum Trading program at www.technicalindicatorindex.com , we chose not to enter a new position during the past two weeks for this reason. Prices moved in a very narrow range over the past two weeks.

What we are watching for carefully is a new trend directive from our key trend-finder indicators. Once we get that, we will have high confidence that a high momentum tradable vertical trend is beginning. This weekend we see that our key blue chip trend-finder indicators remain on a Sideways signal, however significant progress has been made toward a possible new Sell signal. We got a new Sell signal Friday, September 12^th in the most important component indicator of the three components of our composite key trend-finder indicator, the Purchasing Power Indicator. Downside momentum is picking up, and is very close to being strong enough to trade.

We now have a Sell Signal in the Purchasing Power Indicator and the 14 Day Stochastic components. All that is left is to get a Sell in the third component indicator, the 30 Day Stochastic. This Weekend the 30 day Stochastic’s Fast measure fell to the 70.00 level, and its Slow fell to 76.67. The Fast is 6.67 points below the Slow. Once it drops 10 points below the Slow, we will have a Sell Signal and in combination, our Blue Chip key trend-finder indicators will be on a new Sell signal, where shorting the market would have a higher than normal probability of generating a profitable trade (depending upon if the trade is structured properly, with appropriate risk management controls).

The Purchasing Power Indicator is our proprietary indicator. It can be found nowhere else. I developed it over 10 years ago and its track record of finding the start of strong vertical trends is nothing short of incredible. In my opinion, of all the work I do and information I provide, this is probably the most important for short-term investors and traders. The next most important would be our equally amazing Secondary Trend Indicator which spots intermediate term multi-month trends. The STI (which was previously called our Technical Indicator Index) also has an incredible track record. It generated a new Buy signal back in February 2014, has remained on a Buy signal continuously through this weekend, and since then the S&P500 has risen 160 points. It did not get faked out by short-term corrective declines over the past 7 months. It also has deteriorated over the past few weeks, which we show in a chart on page 9 in this weekend’s report. This has formed a Bearish divergence versus prices. While it remains on a Buy signal this weekend, the divergence is telling us the odds are increasing for a strong stock market decline in the near future. 

The stock market is in a seasonally biased negative period through mid-October. A Sell signal now would make sense. A look at the charts on pages 34 and 36 in this weekend’s report shows the Industrials and S&P500 both look like they are rolling over from a top.

Stocks fell sharply Friday, September 12^th, and the pattern over the past two weeks is one of a series of lower highs and lower lows. This price action has formed a pattern in stocks known as a Rounded Top pattern, which we show in charts on pages 34 and 36 in this weekend’s report to subscribers. If that pattern is in fact occurring, it means a sharp decline is coming over the next month. Large tops can take their time, and rollover slowly rather than spike and fall. At some point they generate strong downside momentum, once they reach the vertical descent point, as if falling off the edge of a cliff. I would not be surprised if this vertical descent point arrives around September 23^rd and lasts into the coming October 7^th Phi Mate turn date and the October 9^th Bradley model turn date. These dates tie in with typical seasonal market psychology time periods that we track.

If a strong stock market decline is close at hand, we would expect Gold and U.S. Bonds to rally at that time. The Daily Full Stochastics for both Gold and Bonds are deep oversold at this time, so they are set up to rally soon, a perfect tie in to our stock market forecast. Bearish Divergences we discuss below also support a coming stock market decline around the above timeframe. There are no guarantees, but this seems a likely short-term scenario into mid-October.

This coming stock market decline is likely wave c-down of d-down. While this decline could shave 5 to 7 percent off the market, around 100 points in the S&P 500 and 850 Dow Industrials points, we do not see this as the start of the next great Bear market – yet. Once this next correction in stocks completes, probably in mid-October, we should see a multi-month rally, wave e-up, which will finish the Multi-decade Jaws of Death pattern. There is an alternate possibility that the Jaws of Death pattern has completed and a major Bear Market and economic collapse that lasts into the 2021ish time period has begun. We place this alternate as a lower probability. We lean toward the Jaws of Death stock market pattern’s top coming in mid 2015.

One interesting side note: So far, the closing all-time high in the Industrials remains July 16^th, 2014, at 17,138.20, which came one day before our last Phi Mate turn date.

It is important this weekend to be very focused on Bearish Divergences between prices and the Secondary Trend Indicator, between prices and the S&P 500 10 Day Average A/D, between prices and the NDX 10 Day Average A/D, between prices and the Russell 2000 10 day average A/D, and between prices and Blue Chip Demand Power, and between prices and the NDX Demand Power, all of which continue to build this week. I would not be surprised if this is telling us stocks will top soon if they have not already, and then we see a selloff into our October Phi Mate and the Bradley Model turn dates, October 7^th and 9th. That decline will likely be wave c-down of d-down. We show charts of these Bearish Divergences on pages 10 through 13 in this Weekend’s Report to subscribers. Here are charts of a few of these.

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Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com.  The statements, opinions, buy and sell signals, and analyses presented in this newsletter are provided as a general information and education service only.  Opinions, estimates, buy and sell signals, and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice.  Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision.  Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment.  Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided. Copyright 2014, Main Line Investors, Inc. All Rights Reserved.