We have now reached the long term projection targets I issued in 2012 at 1703-1706 when the market made a new high of 1705. Previous corrective phases have been led by either the Nasdaq 100 (ND1) or the Dow Jones Transportation (DJT), so we need to keep watch for divergence signals.
So far two such signals in DJT have proved false. In the current environment we already have negative divergence from Shanghai and Brazil’s Bovespa, and near-long-term reversals in long-term yields. So far, however, the appetite for buying dips has not been extinguished. This despite the fact that on this current extension, we have already seen overbought readings akin to May.
We know that extensions without meaningful corrective phases in July-August tend to have rough times in September-October; the month where bottoms tend to be posted. Both technical analysis and history point to these months as being prone to downward moves.
We are beginning to see slippage in short-term daily charts (21-55 day basis), with the first daily ES close below the 21-pd SMA at 1687.25. This failure begins an initial technical downgrade and would be followed by expected testing of further dated levels in a Fibonacci moving average series.
The key price level comes from the 55-day simple moving average at 1647 against the previous highs/breakout levels from July. Once this line is breached then we can move out into longer time frames in search of a likely low. To put it simply, 1647 will be the gateway to a downhill path that may rule the rest of the year.
Below 1647, a corrective phase should test the 21-wk SMA at 1622. If it breaks that level, we must look quite a bit lower for long-term targets. These targets will guide not only long-term option plays, but also determine a downtrend against which all short-term action should be judged.
Key support for the health of the intermediate term uptrend is from 1510-1480. This area represents the worst case into October (unless you are short). Long-term monthly levels come into play in this vicinity. In particular, the region of 1472-1440, which corresponds with the Sept 2012 highs & the January 2013 breakout, will be a significant level around which trades are likely to cluster.
To summarize: on the way down look for 1647 as a key level, below which we can expect more selling. 1622 will be a test of just how much momentum that downtrend has and whether it will push further. Further down, the worst case for October resides at the 1480-1440 area. The best case would be a retest of the June low in the 1575-1555 range.