Stock Market Boom May Be Set for Bust
David Keller, the Chief Market Strategist at StockCharts.com that analyzes technical trends in US stock markets, issued a warning that the markets could be set for a major break to the downside.
The Dow Jones Industrial Average leapt to a 399 point jump gain in the first 35 minutes of trading on Monday April 15. But the market then took a hard tumble falling 653 points to end the day at 37,735.11.
Stock market short term day-to-day movements run on the emotions of greed and fear. The longer term markets performance tends to run on fundamental issues, including corporate competitiveness and underlying customer demand.
Keller called todays’ price action a “key reversal” signal after a hot market run into an extremely over-bought situation. His Relative Strength Index (RSI) that measures stock's momentum for both the speed and size of price changes actually turned down last week. The RSI change indicates that stock prices were going up on weaker demand.
Keller added that his Percentage Price Oscillator (PPO): which uses a series of exponential moving averages to identify the primary trend and indicate trend reversals, is on the verge of breaking below the 200-day moving average that would validate a major sell signals, and align with previous market tops since the 2009 market bottom.
At major market tops, Keller emphasized that you'll usually see overbought conditions as prices move aggressively higher in the later stages of the bull market. His weekly RSI (bottom panel) had pushed above the 70 level in mid-January, and remained above that threshold until breaking this week.
Such a break has occurred ten times since the 2009 market bottom, with five of those signals resulting in some of the most meaningful drawdowns of the last 15 years. The other five times ended up being fairly brief pullbacks within a longer-term uptrend.
But every time the RSI breaks down and the 200-day moving average turned negative there is a very high likelihood of much further downside for stocks.