Stock Market Major Triple Top: Big Drop Ahead? Target S&P 600.

The U.S. Stock Market as measured by the S&P 500 index is at 1429 (Monday, September 10, 2012), just 10% below the all time closing high of around 1565 on October 2007.

The S&P 500 is nearing very strong overhead resistance, and it couldn't surpass it in 2000 (top #1) and then again in 2007 (top #2) when it could not surpass the all time high of 1565.

What if S&P 500 Can't Break Resistance: Target: S&P Level of 600, a drop of 58% from here.

There is a very bearish technical pattern called the "Triple Top Reversal" 

The pattern is more than establishing three peaks (and the stock market price not exceeding the last peak).  It also requires the stock pattern to reach the Confirmation Line (currently around S&P 700), which marks the previous valleys in the Triple Top pattern.  Some websites and books say the average decline from a triple top reversal pattern is around 15-20% below the Confirmation Line.

But since the time between Major peaks is more than 6 months (many years in the diagram above), the average drop is less reliable, but the pattern does mark a Major Market top.

It is possible if this scenario takes place, this could mean that the market could suffer many more years of difficulty (with stock market crashes and violent rallies).

The Fundamentals and Demographics support this theory:

All around the world, there is a global debt crisis, with countries planning to default on their debt.  The United States now has $16 Trillion in National Debt, which is more than 100% of GDP (Gross Domestic Product), and currently, there is no sign that the U.S. can control their finances, spending, and revenue.  This number also does not include $62 Trillion in Unfunded Liabilities or Promises to pay (which includes Social Security and Medicare).

The large Baby Boomer demographic is retiring and they will be selling their assets, and also, they will be claiming benefits such as Social Security, Medicaid and Medicare.  The younger generations are supposed to help pick up the slack, but there is not enough to do that, and there is high unemployment among the young adults, and many people are riddled with high debt, underwater mortgages, and ever increasing college tuition.

The Bond rating Agencies, in 2011, for the first time ever, downgraded the U.S. Creditworthiness.

Based on all this (and more), the U.S. Market might be headed towards another lost decade (2000 to 2020)?

Stock Market (S&P 500) Short Term Positive, Intermediate Term, Still Bearish

After today's S&P 500 breakout above the 50 day moving average and short term downtrend, the stock market should have some short term momentum.

The S&P 500 is currently around 1350.



Next resistance area is around 1400 on the S&P 500.

Intermediate term, the S&P 500 is still on a downtrend. The S&P 500 is still below the 200 day moving average.

But let us see how the market performs as the S&P 500 reaches initial resistance (1400).

We might be in a trading range short to medium term, but looking towards the end of the year, it is still possible that we will still break down below 1270 on the S&P 500 based on a 5 year view of the S&P 500.

Today's Chart

Stock Market Concern: S&P 500 at risk?

Currently, the S&P 500 (using index $SPX) has traded the last few days underneath the 50 day moving average, which is bearish. However, it has not gone below support of around 1488. Just by looking at these two levels, the S&P 500 could trade between resistance and support.

However, there are some things to be concerned about.

• As the S&P 500 hit both recent tops, the number of S&P 500 stocks that are above their 50 day moving average has decreased. Currently, only 40% of the stocks are above the 50 day moving average. All of these are not good signs. (In a later post, we can discuss in more detail using the $SPXA50R as a contrarian indicator. If the $SPXA50R goes too low, that might be a bottom). In the chart above, the $SPXA50R is listed in upper window.
  
• Williams ADX is a technical indicator to evaluate the strength of the current trend. In the chart above, the Williams ADX is in the lower window. The Black ADX line says whether the stock is trending or not. Readings below 20 mean there is a weak trend, and ADX above 40 is a strong trend. In the case above, the ADX line is rising up from under 20 and is moving above 20, suggesting a strengthening trend.
  
• Using William's ADX, when the Red -DI line goes above the Green +DI line, that is generally a sell signal. Of course, this line should not be used by itself. There are many systems which use the +DI/-DI crossover, and many try to keep the trader from getting whipsawed in and out of an index or stock. The crossover often is used in conjunction with the ADX line. In the chart above, we do see the -DI line going above the +DI line, and the ADX line looks to be rising to the 20 level, which suggests a bearish trend may be strengthening.
  

In conclusion, the S&P 500 is stuck between the 1488 level and resistance is the 50 day moving average. Trading underneath the 50 day moving average for several days is negative in itself. While the $SPX has not breached the resistance level with good volume, there are still different concerns with the market based on the negative divergence using Stocks Over the 50 Day Moving average, and Williams ADX.

If the levels don't hold, then maybe the predicted ABC correction may still occur.

Current Chart Update

To look at the chart on a day to day basis, use this link.