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Is This the Start of a Major Market Top?

Wed, Oct 24, 2018 - 4:17pm

spx year to date
Source: Stockcharts.com, Financial Sense® Wealth ManagementPast performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly

Speaking on Financial Sense Newshour Oct. 20, Frank Barbera told listeners that we are possibly witnessing the formation of bull market top.

Here’s what he had to say before the big drop this week. Consider Frank Barbera: Possible Market Top:

“I would actually say the break has been so severe that the odds are pretty good that we're in the process of making a bull market top and that the actual high may already be in place. Anything in the stock market is always a matter of probabilities but…its far more likely in my opinion at this stage that this break is announcing the beginning of a transition phase. And I think the current range is probably about 2685 on the S&P 500 to around 2820. I would not be surprised to see the market trade down and make a new low under that 2710 low we made just recently Oct 11. We'll probably undercut that low in the days ahead...”

Well, that’s exactly what happened (the S&P 500 closed at 2656 as of Wednesday, Oct. 24) and Barbera went on to explain a number of technical and fundamental factors that he believed were weighing on global markets.

When it comes to predicting or tracking the formation of a major stock market peak, one technical indicator to keep on your radar is a long-term MACD, which stands for moving average convergence divergence. It is widely used and cited by many stock market technicians since it helps to track shifts in trend and momentum using two moving averages that, when crossing over, produce bullish (buy) or bearish (sell) signals.

Here is a chart of the S&P 500 with a long-term MACD showing where bullish and bearish crossovers occurred over the past 20 years. As you can see, a bearish crossover occurred near the very peak of the 2000 tech bubble, the 2007 market top, and again, more recently, at the temporary peak we saw in 2015. As of today (Oct. 24), we are getting very close to another bearish crossover.

spx macd
Source: Stockcharts.com, Financial Sense® Wealth ManagementPast performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly

If a bearish crossover does occur, this could either signal a major market peak the likes of what we saw in 2000 and 2007 OR a more temporary one similar to 2015. The key thing to watch will be leading economic indicators and financial stress measures to see whether the fundamentals are deteriorating in a manner consistent with a major stock market peak.

Check back in over the next few days and weeks as we continue to provide updates. Also, for a different take than Barbera’s, we just spoke with well-known market forecaster Martin Armstrong on FS Insider who does not believe this is a major peak—in fact, he believes the Dow will eventually get as high as 40,000 during this cycle (see Martin Armstrong on Market Peak, Political Instability, Soaring Dollar).

And, just for fun: Who or what is to blame for all the selling?

Hangs on our wall at Themis Trading. Sent to us by a very smart market observer. pic.twitter.com/RulSWur2lw

— Joe Saluzzi (@JoeSaluzzi) October 24, 2018

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