In addendum to the general charting outlook we posted yesterday, we thought it would be worth a closer look at an aspect of the market’s momentum that few ever look at (and something we don’t look at all that often).

First though, let’s quickly set the stage by reminding everyone of two of our market calls that others laughed at when first posted, but both of which ended up being very, very right.

The first one was our April 2nd ‘overbought’ call; the market peaked three weeks later, then fell 20% over the following nine weeks.

The second one was our ‘oversold’ call from July 1st; nine weeks later, the market was up 10%.

And here’s the incredible part about both calls….. each was made directly in the face of the prevailing headwind at  the time (and were unpopular opinions when shared publicly).

Care to tap into this proven hint? If so, we’ll warn you now those scales just fully tipped to a bearish posture.

Though we slice and dice it a dozen different ways (and in three different timeframes), at the heart of all the analysis is the market’s breadth and depth…. two data sets that tend to ‘turn’ before the rest of the market does.

Anyway, the chart below says it all; the S&P 500 is on top, and our version of the breadth/depth (TRIN) indicator is below, in blue. Just like April, the breadth/depth indication is dangerously low, and has even started to push upward; it was even pushing upward before Monday’s big dip. For the same largely-unrecognized reason stocks were in big trouble is April, so too are they now.

How far must stocks fall to solve this problem? We don’t expect to see another 20% dip like we did last time. In April, the TRIN readings were rock-bottom for all the timeframes we watch… the long-term one in particular. Now, just this one is suggesting weakness is ahead, while the long-term one (not shown) is still hinting that we’re in a bigger-picture bullish mode. That said…

One way to know when the breadth/depth tool is back to normal - or even oversold - levels is to wait for this indicator line to make its way back to prior peak levels, which isn’t an exact science, unfortunately. Sometimes that’s the 1.30 area, and other times like in July, it didn’t top out (nor did the market bottom) until the TRIN reading reached the 2.00. So, rather than maintain a vigil for a secret number, we just want to watch for key reversals, and combine our breadth and depth clues with other trend indications.

Anyway, our bottom line for today is simply that the market’s undertow is indeed finally bearish, and a decent pullback is very, very likely. We’ve heard that song and dance several times cine July, but this time it’s true…. the tank’s out of gas.

Stay tuned for the bullish counter-move; we’ll let you know when it’s time, right here.

[Note we combine our TRIN analysis with other indicators not discussed in the write-up in order to make the most meaningful (and contextual) use of all relevant data.]

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