The equity market had been galloping upward with increased stock participation, on a severely steepening path. Recent action suggests the market is getting winded. It is too soon to know if the end-of-May action is just a pause or the early stage of a larger corrective trend evolving over months.
The key reversal day that took place on May 22 (see Figure 1) over concern of the Fed “tapering” its bond purchases has caused some attention. (A key reversal day represents price action which moves to a new high vs. the previous day but closes at / near a new low vs. the previous day.) The expectation is for a reversal of the trend in force.
Occasionally, these do not follow the pattern; note the key reversal day arrow on February 25th which did not result in a decline for the Dow. More important to our thinking is that of a key reversal week, which was not registered in conjunction with the day itself. Of course this is no guarantee that the trend won’t reverse, and depends on follow-up action: Rally days should be strong, but that has not been the case on the rally days as we go to press; and declining days are carrying higher volume, indicative of increased selling.
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