“It ain’t over till the fat lady sings” applies to technical analysis just as well as it applies to basketball and opera. No matter how bad we think market conditions are, until it actually breaks down all we have is a warning. As the story goes, when the fat lady’s song is over, the curtain falls and the show, or bull market, is over.
 
With the events over the past few days, the fat lady seems to be on the stage starting her aria.
 
Last week, I wrote here that one of the most important technical features in the market broke to the downside (see Getting Technical, “Will Stocks Suffer Death By a Thousand Cuts?,” Oct. 1). The Standard & Poor’s 500 index moved below the bull market trendline drawn from the key November 2012 low.
 
It was a bearish event, but in the age of the Federal Reserve’s bond buying and low interest-rate programs, breakdowns over the past few years were immediately erased. Last Friday’s September jobs report and ensuing rally once again looked to trap the bears and send the market back up.
 
Despite today’s Fed-induced rally, this time the reality was different. Action this week reversed that rally, and sent the market to fresh closing lows. The breakdown was confirmed (see Chart 1).


Chart 1

Standard & Poor’s 500


Chart watchers noted other factors, including resistance at the 50-day average keeping a lid on Friday’s rally. And even as the market gained last week on economic news, the number of stocks hitting new 52-week lows remained quite high. The rally, though impressive on the charts, was far from inclusive. The rising tide did not raise all boats.
 
The Nasdaq did not fare much better, although it has not broken its major trendline. But it, too, turned lower at its 50-day average, and Wednesday it set a lower intraday low for the current decline.
 
Bulls rightly question whether this is a full-market breakdown because the S&P 500 and Nasdaq are both above their 200-day averages. Whereas the 50-day average is the proxy for the short-term trend, the 200-day is the proxy for the long-term trend. Big stocks indexes, therefore, still have an argument that they have not broken down.
 
Small stocks have been weak all year, and over the past few days the Russell 2000 moved below a very important support floor before turning higher Wednesday afternoon (see Chart 2). The index is now trading close to a 52-week low itself, and that tells us that a whole class of stocks is in anything but a bull market.


Chart 2

Russell 2000
While the capitalization-weighted S&P 500 struggles with its own technical demons, an exchange-traded fund based on its equal-weighted version, the Guggenheim S&P 500 Equal Weight ETF dipped below its own 200-day moving average intraday Wednesday before bouncing.
 
The “regular” S&P 500 is swayed more by its biggest member stocks. The equal-weighted version gives each stock an equal voice, and its weakness further proves that stock strength is centered on a shrinking slice of the market. Narrow leadership is not healthy.
 
I would like to close with a chart of the New York Stock Exchange composite index. Because it is less widely followed than the S&P 500 or Russell 2000, I believe it gives us a better idea of technical patterns and trends. The reason is that there is little arbitrage happening between the cash index, futures and ETFs. A bearish event on the NYSE composite is more likely to really be bearish, and that is what I see now.
 
The index completed and confirmed a double top pattern in development since May (see Chart 3). Last week’s failed breakdown below support from the August low was itself erased with renewed selling, and prices are solidly below their former bull market trendline and marginally below their 200-day average.

Chart 3

NYSE Composite
Topping patterns take many forms, and often they are distorted in the more popular indexes. The NYSE composite shows a textbook version that cannot be ignored.
 
With that said, the market was flirting with short-term oversold conditions. Sentiment was arguably fearful enough to spark contrarians and bottom-fishers into action, so the tinder was dry for a snapback rally. The Fed’s meeting minutes did indeed light that spark Wednesday afternoon.
 
But I am not offering views for day traders. The overriding technical condition has deteriorated to the point where investors should take a step back.
 
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.