October 2014 “Market Top”

Back in October, during the deepest correction of 2014, I did an analysis (“ Lessons from the 2007 Bull Market Top“) of the price action of three major indices and compared it to the 2007 bull market top.

To do this analysis, I had removed all noisy “price information” from the charts and only looked at the behavior of the 50, 100, and 200 Day Moving Averages (DMAs). Doing so filtered out shorter term price pattern noise and could better convey the longer term status of the market.

The objective of this analysis was to see if we could draw any conclusions from 2007 and perhaps determine whether the bull market was indeed coming to its end in October of 2014.

Let me reiterate some of the key points from the analysis:

1. A bull market top is  not an  event. It is a long  process that can last up to 8-10 months
2. Indices top in a progression with the Russell 2000 (small cap index) typically leading the way, followed by the S&P 400 (mid cap index)
3. The S&P 500 (large cap index) is typically the last index to top, sometimes 3-4 months after the Russell
4. 50 DMA crossing under the 100 DMA could be considered an early signal of a topping process, but it is not reliable unless confirmed by the 200 DMA also becoming flat or turning down
5. The top can be declared with relative certainty once the 200DMA rounds over and starts declining, especially in a laggard index like the S&P 500

The bulls certainly had a reason for concern in October as it appeared that some sort of a topping process was under way: the Russell 50DMA had crossed under both 100 and 200DMAs and the 200DMA started declining. By Noanet trader on stockwits