Are Stocks Starting a Strong Decline?

Stocks were flat on Friday, May 24 in light volume pre-holiday trading. We still do not have confirmation that large degree wave b-down has started, as both the Blue Chip and NDX key trend-finder indicators are on sideways signals this weekend, with the longer term Secondary Trend Indicator remaining on a buy signal.

However, the Demand Power/Supply Pressure Indicator shows convergence is rapidly occurring, which is often an early indication of a significant trend turn, which in this case would be down, probably large degree wave b-down. The closing high for the rally from November 2012 is as of May 21, 2013. This could be the actual phi mate turn date ideally scheduled for May 13, coming six trading days late. Turns +/- a week are not unusual.

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If so, it suggests wave b-down has started. Short-term, there was a small change in the McClellan Oscillator Friday, suggesting a large price move is likely early this week. The evidence that wave b-down has started is growing, as the bounce-back rallies this week have failed to reach higher highs. There is a growing Bearish Divergence between the 10 Day Average Advance/Decline Line Indicator and stocks, which suggests a significant trend turn down is coming, which should be wave b-down.

Wave b-down will be confirmed with new sell signals in our Purchasing Power Indicator and the NDX 30 Day Stochastic. Wave b-down could last several weeks, and will be followed by a strong wave c-up rally to the rising upper boundary of the Jaws of Death pattern we show this weekend on page 24. Once that top boundary is reached, it means the odds of Grand Supercycle degree wave {IV} down starting are very high. This will be a very dangerous and lengthy Bear Market.

Above we show that the NYSE Advance/Decline Line Indicator we track has formed a sharp and clear Bearish Divergence with prices, which is typical when market tops are forming. It means fewer and fewer stocks are participating in the rally and the market is vulnerable to a significant decline. This chart is suggesting the large degree wave a-up rally from November 2012 is either over, or very close to ending.

While the above chart shows that the Demand Power/Supply Pressure Indicator remains on an enter long positions signal, there is rapid convergence occurring between these two measures, which is often an early warning of a significant trend turn, which in this case would be the start of a decline. See the yellow oval showing this convergence.

Originally written for www.technicalindicatorindex.com by Robert McHugh, Ph.D. McHugh is President and CEO of Main Line Investors, a registered investment advisor in Pennsylvania. The statements, opinions, buy and sell signals, and analyses presented here are provided as a general information and education service only. www.technicalindicatorindex.com is currently offering a FREE 30-Day Trial Subscription, which can be accessed here. Coming in October 2013: McHugh’s new book: The Coming Economic Ice Age, Five Steps to Survive and Prosper.

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