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TheStreet Open House

Has the U.S. Stock Market Reached a Critical Turning Point?

NEW YORK (TheGoldAndOilGuy.com) -- The past two years we've seen the stock market steadily climb with low volatility. All investors and traders have had to do was simply buy the pullbacks within the stock market and ride the market to new highs. While this has worked out very well to date, most will be in for a big surprise when the market trend reverses.

As of today, my algorithmic trading system -- which uses momentum, cycles and volume flows -- has signaled the market is now in a downtrend.

My strategy identifies intermediate trends within the market. These trends typically last three to 12 week, meaning the U.S. stock market is in for a wild ride.

Read More: 8 Stocks George Soros Is Buying in 2014

The big question is if this is just another correction within the bull market or the start of something much larger.

What appears to be forming, in my opinion, is a major topping phase in the Russell 2000 index. If this is the case we will see a spike in fear that sends to the VIX, also known as the fear index or the volatility index, surging into the 30s and possibly even 40s, similar to what we saw in 2011.

The intermediate top that took place in the Russell 2000 index in 2011 is the same topping pattern we have today. This pattern led to a 30% drop in the index within a few weeks. The question is whether this marks the start of an actual bear market.

With the stock market being so frothy and in rally mode for over five years,  it is overdue due for a bear market to cleanse the greed and displacement among market participants.

The good thing is that the Russell 2000 is a leading index. Meaning, it typically leads the U.S. stock market (the S&P 500 and the Dow Jones Industrials). What we need to do is watch carefully as the Russell 2000 tests this critical support level (shown in this video) of the head and shoulders topping pattern and neckline. A breakdown through this neckline will trigger mass panic and selling in the financial market.

As of today the S&P 500 and the Dow still look to be in a strong uptrend. But the underlying technicals and market internals are telling us otherwise. The average investor is likely buying into this dip once again which they have done for the past couple years. With the average investor accumulating more stocks at these lofty prices they will likely be the ones left holding the bag when the market crumbles.

Since early April 2014 we have seen heavy distribution within the stock market, though most people don't realize the distribution is happening. A trained eye can spot when the big money is rotating out of certain high beta stocks, sectors, and indexes.

In January this year we saw the bond market put in the bottom and form a basing pattern. Bonds broke out of this pattern in early May and have been slowly working their way higher since. It's just a matter of time before bonds jump in value, but it will not take place until the stock market starts a correction which looks to be only weeks away. Money will flow out of the stock market and looks for a safe haven, which bonds are the most popular and predictable.

Read More: Warren Buffett's Top 10 Dividend Stocks

If we take a quick look at crude oil, it has been trading in a large consolidation pattern for the past two years. Price is nearing the apex of this pattern and a large breakout will happen in due time. With the economy slowly bouncing bottom I feel a breakdown in crude oil will be the likely outcome.

Conclusion:

Short-term traders should be looking to short any bounces in the market until our algorithmic trading system signals that a new uptrend has started.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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