July 28, 2010

Why You Shouldn't Discount the Latest Sell Signals

There's now a rare stock-chart formation that suggests a drastic price reduction in the very near future.

After falling as low as 1,011 on July 1, the S&P has staged a remarkable rally. Courtesy of rising prices, complacency has once again staged a comeback on Wall Street.

Despite this rally, we should not forget that nearly all major U.S. broad market indexes and sector indexes are trading below the 200-day simple moving average (SMA).

This bearish signal is compounded by the fact that the 50-day SMA has crossed below the 200-day SMA for a majority of indexes.

The 200-day SMA is the line in the sand that separates technically healthy stocks from the sick ones. For good reason, the break of the 50-day SMA below the 200-day SMA is generally considered a death cross.

Over the past 10 years, buy/sell signals given by the 200/50-day SMA crossover have had a 75 percent accuracy ratio, with winning trades outperforming losing trades by a 2.8:1 ratio.

Those are not odds you want to bet against.

Of course, the SMA crossover is just now confirming what the ETF Profit Strategy Newsletter predicted back in April, when it stated that "the pieces are in place for a major decline. Historically, there's rarely been a more pronounced sell signal."

This sell signal has certainly proven true and is now compounded by the message conveyed by the 200-day SMA. Currently in progress is the development of a rare chart formation that suggests a drastic price reduction in the very near future.

This chart formation provides two very distinct target areas for the market to be reached.

A look at the general weakness still evident in the overall economy (unemployment, consumer spending, etc.) and in the real-estate market certainly enhances the bearish technical message.

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The ETF Profit Strategy Newsletter includes a detailed short, mid and long-term forecast along with the one chart that outlines the market's path ahead.

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