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SPX Breadth Is The Problem

Edited 9/24/14 7:40am

Market breadth has deteriorated badly once again. In fact, breadth hasn't been strong for several months (since early July).  Even last Friday, when the market gapped higher on the Alibaba (BABA) mania, breadth was negative — a divergence that proved to be significant so far this week.  Cumulative breadth has been a problem since July.  Were market makers (MM) merely propping up the market until the IPO went off?  Surely a market selloff leading up the launch could risk Alibaba founder Jack Ma to possibly post pone the event; a smear the market wouldn't want to face (not to mention unhappy investors).

I'm sure Jack Lew's comments at the G20 summit that he is pursuing methods to curb tax inversions (and soon) along with funds approaching end of their fiscal year is not helping matters. 

Cyclicals (XLY) and consumer staples (XLP) experienced big selling today; the former closing below it's 50d.  Retail (XRT) also closed below the 50d; filling the August gap however it did not find buy orders there; rather closing on the lows.  Not an encouraging sign.

Energy (XLE) has been no help as it follows other commodities (now in bear markets) lower, now at its 200d.

Small caps ($RUT) decisively broke lower trend line support.  As mentioned Friday, VXX long has been a good hedge as well as TWM hedge posted yesterday.

On July 3, both SPX and the “stocks only” cumulative breadth line made new all-time highs together. Since then, SPX has gone on to close at new all-time highs another nine times, but cumulative breadth hasn't made any new highs. Thus a negative divergence exists here, and while the timing of such divergences as sell signals is somewhat vague, the importance isn't — this is generally the sign of a major top if it continues to persist. We treat it this way: If SPX breaks major support ($1979) while this negative divergence is in place, one should allow for the possibility that any correction could be a severe one.  My cover stop (alert) would be a little over a 50% retracement of this sell off, or $2003.50ish.

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