We are starting to see weakening in breadth data that is suggestive of a possible short-term correction in the market. With the highly anticipated upcoming September 17-18 FOMC meeting, we could be in store for some volatility and market weakness.

While it is highly anticipated that the Fed will begin to taper its quantitative easing (QE) program next month, what the market is uncertain about is by how much and at what pace. This uncertainty will likely keep the market’s near-term upside potential limited and may open up a small correction or consolidation.

Once we have the uncertainty behind us the markets are likely to head to new highs given how robust the market currently is (excluding short-term divergences) as well as having an accelerating economy, as seen by the sharply rising service and manufacturing PMIs that were released last week.

One negative divergence I am seeing is the 200-day moving average (200d MA) for the daily NYSE advance-decline line, which is diverging with the S&P 500, as is the 20d SMA of the NYSE percent new highs minus new lows. While we are seeing some negative divergences in the two indicators below, they remain in positive territory and we would need to see dips into negative territory before even remotely considering the potential for a major market top.

(Click HERE or on image for larger view)

….2 more charts & read more HERE

Related: Jeff Saut: The Market Is Overbought – Raise Some Cash

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