IT'S BEEN A LONG TIME COMING

FINALLY A BREAKDOWN
The S&P 500 has finally decisively broken down through the support formed by the rising trend line that marks the bottom of the ascending wedge formation. This was the technical expectation, but the market sure did fight it. The break has also carried the price index through the 20- and 50-EMAs. I have drawn a dashed line from the November low, parallel with the upper boundary of the wedge to suggest a possible bottom of a rising trend channel. This line is not drawn by strict technical rules, just a bit of speculation on my part.

The first obvious support is at about 1030, not a real problem; however, the next obvious support is at about 870. That would be great in terms of a substantial correction, and it would raise fear levels to the point where a good buying opportunity might appear.

The weekly-based chart of the S&P 500 shows that the PMO has topped at a very overbought level, hinting that we may be at an important top. On the positive side, the price index is holding above the long-term declining tops line.

In the short term the market is very oversold, as illustrated by the Participation Index chart below. This could represent an initiation thrust for a decline that will last a lot longer, or it could mark the end of the decline altogether. The latter does not seem likely, but it would be consistent with the market action we have observed in recent months.

Bottom Line: We have just witnessed the worst three-day decline since the March 2009 bottom. I think it is the beginning of a more substantial decline, but short-term indicators are so oversold that the next thing we will probably see is a bounce. The most important thing to watch in the medium term is for 20-EMAs to cross down through 50-EMAs. In most cases, this will change buy signals to neutral signals, except where the 50-EMA is below the 200-EMA at the time of the 20/50-EMA crossover. That would be a sell. In the event that the S&P 500 bounces high enough to exceed the January highs, I would have to assume that the presently anticipated correction has run its course.