About a week ago, fortunately, I was actually right and alerted readers that I would be selling any rallies in the S&P. After the famous “Euro Bailout Rally,” which turned out to be a one-day wonder, we have done nothing but go straight down. You get the feeling that some of that bullish complacency is eroding from a year-long cyclical bull rally that took indices up nearly 100%. What next? Well, I say, watch out for the “Death Cross.”

What is the Death Cross? It’s a technical indicator produced when the 50-day moving average crosses over the 200-day moving average. The reason it’s important is that a lot of professionals watch these averages, and it’s also an indicator of a medium-term change in trend. In other words, if we get the death cross, you would see a lot of people move from bull to bear mode, and you would also see a mad scramble for a lot of people to sell and lock in all those profits from the last year.

Things can change in a hurry. What I find so dangerous about this rally is that a lot of it was artificially produced — i.e. the government giving big banks free money to trade and run things up — and thus I think there is a lot of “fast money” in the market. What happens when fast money starts losing? It sells quickly.

Below is a chart of the potential for the “Death Cross.” That’s when the green line (50-day MA) crosses the red line (200-day MA). As you can see, we got a Death Cross in January 2008 (timing interesting, eh?), at which point things began to accelerate to the downside.The averages are currently losing steam, but they are basically flat and have yet to accelerate to the downside. That is what’s truly scary. It’s very possible we have formed a major top which will accelerate to the downside.

Now,nobody is clairvoyant. It’s possible we have not made a top, that governments will rush in and start using all those newly minted Euros and Dollars to buy up the market. But they don’t have as much dry powder left, do they? Markets are about probabilities, and I see a higher probability to the downside for the remainder of the year.

That would mean we are ending the cyclical bull market and re-entering the secular bear. But it’s also possible we’ll get a sharp snapback rally first, as the indices are so oversold. It will be very important to see if that rally fails below 1125 or so in the S&P. We will then be setting the stage for a longer waterfall decline. The reason why I think this scenario is highly likely is because I think the trust in the markets is very tenuous, and with so many levered, crazy banks involved in the process, things could get ugly in a hurry.