The 2-day Bullish Reversal on Thursday and Friday Should be Ignored

Normally, a two-day reversal, where the second day closes above the previous day’s high, is bullish. But the market is just under a huge resistance area. The 11-20, 11-4, 7-20, 6-23 and 5-19 highs are all successively higher (the 5-19 high is the highest). For the stock market to change its bearish stance to bullish, it will have to pass though all the intermediary highs and, finally, surpass the 5-19 high. This is very unlikely in light of the current economic weakness. This includes a collapse in international trade, a crash in capital expenditures, a crash in commodity prices, and an historic high in inventories divided by sales.

The stock market is a giant bubble that central banks fueled around the world since the mid 1980’s. The median wage in 1989 is identical to the current median wage of $53,000 expressed in constant 2013 dollars. But, the stock market is up 1,000% during the same period. The stock market is supposed to reflect main street. Instead, the Federal Reserve has inflated the stock market by means of its zero interest rate. Powerful and sophisticated investors can utilize this almost-free short term rate as a basis for their stock gains.

Here’s the weekly chart (i.e., every bar represents a week) of the S&P 500. It’s much easier to see the current weakness here. Notice that since the middle of July, the price has been underneath the long-term bullish trend line with the exception of only one week in early November.

sp500-weekly

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