T2108 Breaks Its July Lows

It turns out that the lower lows I noted in T2108, the percentage of stocks that are trading above their 40-day moving averages (DMAs), were indeed leading to at least one more lower low. T2108 fell dramatically today, from 48% yesterday to 23% today. This breaks the July lows as well as the series of lower lows started in August. The current aggressive sell-off in the market has sent individual stocks hurtling downward in rapid fashion and nothing shows this action better than T2108. See chart below:

*Chart created using TeleChart:

The stock market has now gone from stubbornly overbought to borderline oversold in just 4 days (T2108 above 70% represents overbought and below 20% represents oversold). At this point, shorts typically begin covering positions – although the market can of course continue lower (as the adage goes, bull markets have no resistance and bear markets have no support).

Time has run out for “the” Fall correction I was anticipating. But given the current technical damage, I will add “top and double top-watch” to my “correction watch.” I claim that with good headline earnings news getting sold consistently, there are no near-term positive catalysts on the horizon to propel the market to new 12-month highs. Even tomorrow’s U.S. GDP number could be a no-win setup: good number and speculation increases on rate hikes, sending the dollar higher and the market lower; bad number and fears roam around a double-dip recession. (Some alternative catalysts to consider: another Goldman boost to its year-end S&P 500 price target from 1060 to 1150, more freshly printed currency from the Federal Reserve, or bulls stepping up their buying in the belief that it is still the contrarian thing to do).

Regardless, the recent selling has created a lot of technical damage. The S&P 500 has not made a lower low since the July lows. If the October lows give way, the current correction could grow longer legs.

Stay tuned….and be careful out there!

Full disclosure: no positions.