Rally Is Being Undermined

Most people are familiar with the Golden Cross, which is when the 50EMA of a price index crosses up through the 200EMA. The Golden Cross has positive long-term implications, but to address the intermediate-term I chose the 20EMA and 50EMA and thought it appropriate to call an upside crossover a Silver Cross. Our Silver Cross Index is the percentage of stocks in a market/sector index that have the 20EMA above the 50EMA.

Currently, the Silver Cross Index for the S&P 500 is flashing a sharp negative divergence. Specifically, last week SPY hit a new, all-time high, exceeding the previous top in May. Conversely, the recent Silver Cross Index top was significantly lower than its May top, showing that support for the rally is rapidly fading. We can see other negative divergences on the chart, and the one in February 2020 notably set up the bear market.

A related chart shows the percentage of stocks above their 20EMA and 50EMA, which is another indication of the degree of participation in a given price advance. Again, we can see sharp internal deterioration over a two-month period.

CONCLUSION: With this obvious evidence of fading rally participation, we should expect some type of corrective action very soon.

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