Good Sunday afternoon Slope. First off, with all due respect to my good friend BDI, when I say "Boom", I am anticipating an explosive move to the downside. As you can probably gather from that statement, my flirtation with the bullish side of the market over the past 6 weeks has come to an end. The great Bearish Rev has returned! Let's take a look as to why.
To start with, let's look at our old friend EWP vs SPX. Divergences in this comparison chart have served well over the past couple years to indicate short and medium term turning points in SPX. As you can see in the chart below, EWP is currently showing a negative divergence. In my opinion, any further upside in the markets next week, are an opportunity to sell longs, and build short positions.
Next, let's look at BHP. As many of you know, I have also been tracking BHP as a good leading indicator over the medium-long term. As a mega-cap, global commodity producer, BHP serves well to give us a window into what is actually happening in the global markets. As you can see in the chart below, BHP's massive H&S top continues to develop. As compared to SPX, BHP never came close to regaining it's April 2011 top. SPX however continued higher and broke its April 2011 high. This divergence is bearishly compelling. A break under BHP's 2010 low would have extremely bearish consequences. I expect BHP to be a $10-15 stock at some point in 2013.
Copper is telling much the same story as BHP. A large H&S top continues to develop. On a shorter term time frame, notice that JJC has already taken out its June 2012 lows. On 6/8/12, JJC had an intraday low of 41.74. On 8/2/12, JJC made an intraday low of 41.70. Copper continues to serve as a nice leading indicator for SPX. We are going lower.
So where does this leave us with respect to the overall indices? While I continue to track $GDOW, $NYA, and $SPX, I believe $RUT gives us the best road map for the long term. At this point, I'm looking for a test of the green neckline, possibly around late October of this year. The test could then be followed by a brief rise into the end of 2012, culminating in a final washout throughout 2013. Take a look at the MACD uptrend line coming off the August 2011 low. A breakdown of this trend line should have bearish implications in the intermediate term. Also, a breakdown of the green neckline will have very bearish implications for the long term.
The bear is coming back, and he is coming back with a vengeance!