This is the first real technical warning sign that the market is on the verge of breaking down and the economy is on the verge of a recession.

See figure 1, a monthly chart of the i-Shares MSCI Emerging Market Index (symbol: EEM). The pink labeled price bars are negative divergence bars. As I have detailed numerous times, negative divergence bars represent slowing upside price momentum, and typically, the lows and highs of that price bar will provide a range for future price movements until there is a breakout or breakdown. In addition, a clustering of negative divergence bars typically is a sign of market top. This is fairly consistent across time frames and different asset classes. For example, see the article I wrote on April 27, 2011 entitled "Long Term Treasury Yields Going Lower". That "call" was based in part on this research.

Figure 1. EEM/ monthly

The cluster of negative divergence bars is an ominous sign, and as you see, the 2007 top had a cluster of negative divergence bars. For example, in the SP500, a similar pattern was seen at the 1965, 1968, 1973, 1977, 1981, 1987, 1998, 2000, and 2008 market tops. As an aside, I need to dig into the numbers a little bit more deeply, and I will do so over the next couple of weeks, but for now call this a warning sign!

Lastly, this is "call" or observation is obviously bearish; however, I do not believe that it will affect the market over the next couple of weeks or maybe even months. My contention is that the market should bottom as sentiment is bearish. I will give the market the benefit of the doubt here. I have questioned the quality of the ensuing bounce, but in the absence of a crystal ball, I still believe the correct "play" is to get long when others are bearish.