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Make or Break Time… Kinda

It’s looking like make or break time for the market. So far, it looks like we’re seeing normal consolidation with healthy market internals. But, we’re getting close to a point where the risk of a 10% correction rises substantially. Long time readers know that when the bullish percent index (BPSPX) gets below 60% the odds of a large decline rises. We’re getting close to that warning level.

161014BPSPX

Looking at a daily closing price chart of the S&P 500 Index (SPX) it appears that we’re painting a bull flag. Once the consolidation is over, this pattern should resolve upward.

161014spx

One positive thing that indicates we may have seen the worst comes from support and resistance levels tweeted by traders on Twitter (from Trade Followers). Yesterday, SPX caught at the first support level near 2120 then rallied sharply. This goes into the plus column, but SPX is still pretty far above its 200 day moving average. I wouldn’t be surprised if the current rally fizzles and takes the market down to the next major support level at 2100 sometime next week. This level also lines up with the bottom of the bull flag in the chart above which is another logical point for a bounce (or bottom of a dip).

161014spxSR

My core market risk indicators are still showing strong internal support for a rally into the end of the year.

161014MarketHealth

Conclusion

It’s make or break time for the market… kinda. Most of the market internals that I watch are showing strong indications that the market should rally into the end of the year once the current consolidation is over. However, the bullish percent index (BPSPX) is getting close to a point where major declines start. If we get a dip down to the 2100 level on SPX we want to see BPSPX hold above 60% on a weekly basis.

 
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