The S&P 500 Equal Weighted, S&P 600 and the Russell 2000 all broke uptrend channel lines yesterday signaling 1) a further consolidation or 2) a larger correction lie ahead. Either way, traders should remain cautious until the markets become more oversold or until the indexes can re-capture these broken levels. We’ll know by the end of the week if this is just a "bear trap" caused by options expiration but until then, I’m operating under the guideline that a breakdown in August often leads to weakness in September.
Yesterday, the S&P 500 broke down from a triangle at 1226 and a sideways consolidation at 1223.
Even more worrisome is that the the S&P 500 Equal Weighted Index (SPXEW) broke down from a strong up channel. I often use the S&P Equal Weight rather than the S&P 500 to gauge the market’s health because it more accurately reflects what the average stock is doing. That index looks like it wants to test the support range from which it broke out last month.
The S&P 600 (SML) broke down from a rising channel as well and shows a high probability of trading down to recent support levels between 330 and 337. The Russell 2000 (RUT – not shown) broke a similar rising channel and is currently sitting on the upper end of the support range.
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