Written by Erik McCurdy, Prometheus Market Insight

In early June, we noted that the historic stock market bubble had begun to exhibit early signs of weakness, suggesting that the bull market from 2009 was becoming susceptible to a long-term reversal. Two days later, the short-term uptrend experienced a meaningful breakdown when the S&P 500 index closed well below support at the lower boundary of a rising wedge formation on the daily chart.

The rising wedge breakdown signaled the likely start of a meaningful correction and today the index declined more than 2% as it approached critical long-term support at the 200-day moving average.

Given the continuing deterioration in market internals such as breadth and volume, a daily close well below the 200-day moving average at 2,054 would be a significant breakdown and increase the likelihood of a long-term reversal.

With respect to cycle analysis, the sharp decline today moved well below the last short-term cycle low (STCL) in early June, signaling the likely transition to a bearish translation and favoring additional short-term weakness heading into the next low in late July or early August.

Moving out to the intermediate-term perspective, the sharp decline during the last four sessions is tracking the bearish scenario that we outlined last week. A weekly close on Friday at current levels or lower would signal the likely transition to a bearish intermediate-term translation and favor four to five months of additional weakness heading into the next intermediate-term cycle low (ITCL) in October or November.

Additionally, a weekly close well below the middle of the Bollinger bands on the weekly chart at 2,096 would predict a relatively quick return to cyclical bull market support near 1,990.

As always, it is important to remember that a long-term top is a process, not an event. The bull market from 2009 will remain healthy from a technical perspective as long as it remains above long-term uptrend support. However, the developing short-term and intermediate-term breakdowns are significant, especially when coupled with the deterioration in market internal data such as breadth and volume. The next test of bull market health will occur at the 200-day moving average, so it will be important to monitor market behavior carefully during the next several sessions.