Market Action Consistent With Near Term Top

Today, the Dow and SP500 failed to make new highs while the Qs equaled Tuesday's high. The Qs definitely appear to be near to completing 5 waves up from the May 26 low, if they have not done so already. The SP500 closed just under its 200dema and just under its Jan 09 high. I think at least a pullback is imminent if not a strong correction, which should trigger a negative divergence MACD sell signal.

We are also seeing a negative divergence in the McClellan Summation Index. While this does not necessarily have immediate implications, it does suggest that the current rally is weakening. Oftentimes, we will see the Summation Index decline steadily for some weeks as the market continues to rally. When the Summation Index makes a lower top or falls below 0, a market top is often in the making. My proprietary market breadth indicator has declined steadily over the last 4 weeks as well. Both of these facts point to a narrowing of the rally.

Sometimes this type of breadth divergence will lead to a sudden swoon that seems to come out of nowhere, but I am also cognizant of the fact that the market can rally longer than anyone expects. Nevertheless, I'd rather wait for a better entry point than chase this rally.

The post-election year presidential cycle has worked very well so far this year in modeling the market's behavior. It is suggesting a top is imminent as well.

It will be interesting to see what the reaction to the employment report is tomorrow.