Stock Market in Big Trouble: Red Flags Showing up on Charts

Stock Market in TroubleThe S&P 500 recently reached another record high, while the NASDAQ is looking at taking an additional run at a new record. My analysis of the technical charts points to something worrisome on the horizon for the stock market.

It’s amazing the battles the stock market has won this year, despite all the overhanging risk domestically and in the global economy.

Yet the reality is that the S&P 500 has not encountered a major correction of more than seven percent or so in years. Still, the risk is there.

Just consider what happened to the benchmark Shanghai Composite Index after plummeting over six percent intraday. Of course, the Chinese stock market has been sizzling on euphoric buying. So the volatility was not unexpected, will likely continue, and even worsen. The establishment of the HK Shanghai 360 Stock Connect has been fueling the recent surges.

I’m actually beginning to be fearful of Chinese stocks listed in China. Now I’m hearing there will be four new sector indices created in China. I smell trouble brewing and would be protecting my portfolio or trading using put hedges on Chinese exchange-traded funds (ETFs).

Red Flags Raised for Stock Market

If you think U.S. stocks are not vulnerable, think again. They may not be as vulnerable as Chinese stocks, but let me show you some red flags emerging on the charts.

The 50-day moving average (MA) has been a key battle line for the major stock indices. So far, it has held and rallied after declines below. The Dow is just below its 50-day MA.

Here we are approaching the midpoint of the year and the S&P 500 and Dow are foreshadowing a gain of just over two percent based on the advance so far. This would make it one of the worst years during the six-year bull market.

The S&P 500 has closed lower in five of seven sessions to Tuesday, and down in 11 of 16 sessions. Despite this, the index continues to trade in a range, as investors seem to be sitting on the sidelines waiting for something to happen. The light volume suggests caution.

S&P 500 Large Cap Index Chart

Chart courtesy of

We are not seeing the leadership from the technology sector that we witnessed in 2014. The NASDAQ is holding above 5,000, but is really unable to gather any steam to break higher.

Trading volume on the NASDAQ is on the light side. There have only been about six sessions this year where we saw over two billion shares trade on the exchange. The 20-day MA for volume is 1.7 billion.

NASDAQ Volume Summation Index Chart

Chart courtesy of

Momentum Fading 

A look at the U.S.-listed stocks points to only 47% of stocks above their respective 50-day MAs, down from 61% a month ago with highs of 68% this year.

NYSE Percent of Stocks Above 50 Day Moving Average

Chart courtesy of

In the near term, things are somewhat better, as 50% of stocks are above the 20-day MA versus 42% a month earlier. This is well down from the highs of 80% in January. This number has been on a steady negative trend since January to its current levels.

The same goes for the 200-day MA, which has seen the number fall from 84% in April to the current 55%.

I would not be surprised to see downside moves. I would be protecting with put hedges and taking some money off the table.