NEW YORK ( TheStreet) -- This week's downside moves in the S&P 500 have been some of the biggest since June, as a series of earnings miss-steps and important chart analysis signals indicate market sentiment has reached an exhaustion point, and that we are in store for a period of downside correction.In earnings forecasts, some of the latest disappointments include weaker results at Wal-Mart ( WMT) and Cisco ( CSCO). When we factor in the majority expectation that the Federal Reserve is prepared to start phasing-out its monetary stimulus injections, prospects for equities start to look more bleak, given the lack of fundamental drivers in place to drive stock prices higher. So, while this does not mean equity values have reached a long-term top, it does suggest a period of stalling. Steady improvements in macroeconomic data have led to higher bond yields as the current environment of zero-interest rates now has a more definite conclusion point. Treasury yields are now seen at their highest levels in two years and each of the 10 industry groups in the S&P 500 have shown weakness in this latest move lower. Earnings disappointments, the prospect of higher interest rates, and stalling growth in emerging markets limit prospects going forward, and should give investors an early signal that bullish momentum will start to slow. Economic Data Evidence of this slowing momentum can be seen from a chart perspective as well, and I will address some key pattern signals showing this at the end of this article. But, fundamentally, jobless claims have eased Fed concerns for the labor market (lowest levels in six years), inflationary pressures are starting to build (cost of living has increased for three straight months), and generalized pricing pressures are moving towards the Fed's target levels. At the moment, we are seeing a market environment where improving macro data is being interpreted as a potential negative. When we view this tendency in sentiment alongside other potential negatives, it makes sense to consider taking profits when the SPDR S&P 500 ETF Trust ( SPY) is making short-term rallies.
The biggest risks to this year's gains in SPY would be seen if the Fed does make the choice to start making reductions in its monthly bond purchases (currently seen at $85 billion). Early estimates suggest that these monthly purchases will be lowered by $10 billion, so anything beyond this would suggest a deeper downside correction in the S&P. On its face, this is not something that should concern the traditional "buy and hold investor." But it should also be clear the market environment we have seen in the last five years is an entirely different animal. For those of us looking to buy dips, it makes sense to wait for these downside corrections before establishing new bullish positions. The S&P 500 has rallied more than 150% from its 2009 lows. This year alone we have seen gains of more than 20% and new all-time highs have been established in the process. Nearly 450 companies have seen bull moves in 2013, and trends like this have not been seen in more than 20 years. This is a lot of optimism. While P/E valuations remain supportive, moves of this size warrant some level of caution. Buy dips, rather than upside breakouts. S&P 500 Chart Perspective
Late-week declines in the S&P 500 end a month-long trading range and mark the completion of a head-and-shoulders chart pattern. This pattern is my personal favorite reversal indicator because it suggests prices have made a clear attempt at a new high, only to reach an exhaustion point and fail drastically in the end. A clear break of the pattern's neckline occurred at 1675, and the expected follow through has resulted in lows of 1654 thus far. Expect any short-term rallies into 1670 to meet additional selling pressure. At the time of publication the author had no position in any of the stocks mentioned. This article was written by an independent contributor, separate from TheStreet's regular news coverage.