I suppose it is still theoretically possible that last Thurs is the top - the drop from which started before the "Sue Goldman" story broke, indicating it was driven by technicals not news. (I find the market in the short run almost always technical, with occasional jinks and ives from news that do not last very long - as the bounce from Sue Goldman clearly shows!)

While the break was expected, it is not expected to be more than a pullback before a higher high. It is not clear that it is over, but most likely so. The pattern to look for is whether a break is a false break, meaning goes below the lower trendline that has marked low points all the way up (as this one did) and then comes back above and stays above. MarketPulse shows the break of the trendline, and then coming above:

The Dow settled in at a 78% retrace of the recent high (the close at 11117 sits right there), although went almost all the way back intraday. The S&P closed a gap at 1203 and sits right at 78% as well, although it too went a bit higher intraday. If this were an impulse down, the first drop would be a wave 1 and the bounce back a wave 2. Waves 2 can go back 99% but seldom break 62%, and almost always when they break 78% go to new highs. Thus both major indices sit at the point where any move higher essentially de-confirms a top.

On the other hand, this whole break could be merely a correction, a wave B or minor wave 4, before a continued advance. As such, the 78% rule does not apply. Besides the obvious move to new highs, watch whether it stays above the trendline, which also de-confirms the break down.

If the top is still ahead, what could flag that it is near? One indicator is to watch junk bonds, which act like an intermediary between bonds and equities, and are sensitive to changes in underlying market conditions - specifically, a change in junk indicates a change in riskier bets. Doug Short has a nice piece today from Chris Kimble which shows how they tend to bottom or top ahead of the S&P:

Another indicator is copper, my favorite "Cunary in the coal mine". Copper has been rising in price as well as inventories, indicating real demand. In 2008 copper prices plunged and inventories rose - no surprise. As prices rose, inventories got worked off, and inventories turned back up, but prices kept rising. Usually copper rises early in a recovery, so this is a good sign; but much of it is attributed to Chinese stockpiling. As suppy/demand has rebalanced, prices have begun tailing off, an indicator that Chinese tightening is having an effect. They key to watch is a continued rise in prices, which either reflect a huge "bubble echo" in commodities (more on that in a later post), or a real recovery. (Funny, the prior link speculates about Peak Copper driving prices up even as inventories stay tight, which to me is yet another indicator that we are in a Bubble Echo in commodities - when oil prices peaked i 2008, Peak Oil was the explanation, not bubbleconomics).) If instead prices keep dropping with inventories, this indicates slackening demand, and the Cunary chirping "top ahead!"





Since much of the the Cunary is driven by China, a third indicator is the SSEC, the Shanghai composite. Emerging markets play a similar role to junk bonds in that they are a riskier place to invest and are sensitive to trend changes. Trendlines runs a series of posts on the SSEC and is worth checking out. Their current view is a drop in the SSEE to complete a triangle, then a thrust higher. We all remember how it bottomed first, in Nov2008, before our Mar2009 bottom, and led the way up. Its secondary top after the 2007 peak was back in August 2009. If it thrusts higher out of the triangle as Trendlines suggests, we might see it beat the Aug2009 high. The top after that could give a three or so month early warning of the top in the US.

ContrarianAdvisor, befitting its name, takes the opposite view: the SSEC has just broken below the 50 DMA and the lower trendline of a wedge, and is within a tenth of a percent of the lows for 2010. If we stay below the wedge, the SSEC would signal that it is now in the next leg down, and chirp a warning for US stocks. The potential fall suggested by this pattern is 30%.

While a fall by the SSEC itself this is not worth much as an indicator, look to see if it is confirmed across other emerging economies, especially the BRIC or BRICKS (BRIC plus Korea and Singapore). It may be the wedge with three tops so far is presaging a long topping action in the US, the triple top that may emerge from Jan19, Apr15 and whenever the final top comes between May and August.

More ominously is if the wedge breakdown is due to expectations of China letting the Yuan float again. The drop in the SSEC has been dramatic - yesterday was nearly a 5% fall.