Let’s Be Careful Out There

On Tuesday, the S&P 500 fell 0.1%. While this was a fraction of Monday’s 2.2% decline, it was in some ways more damaging to the post-March trend. For example, near term momentum now has a bearish bias for 10 of the 24 industry groups. While this is not yet a majority condition, such a significant minority is often a warning sign; as such, we could well see a majority bearish condition in the next day or two.

With that near term momentum condition in mind, it is also worth noting that the S&P is severely testing both its hourly trend line from the April 28 low and the daily uptrend line from the March low itself. The aforementioned evidence of renewed momentum deterioration does not bode well for the trend lines’ ability to prevent their imminent violation.

In recent posts we have referred to the increased fatigue being exhibited by the post-March uptrend. Tuesday’s evidence was clear evidence of that fatigue. Cycles, intermediate momentum, and even sentiment suggest that the rally still has some life left in it. And we still think that there is the potential for a challenge of 944-955. But we are reminded of the police sergeant in the award-winning TV show Hill Street Blues, who regularly told his colleagues to “Let’s be careful out there.”

Our concern is that, even if the market does regain its footing and mount another challenge of 930 and higher, the damage of recent days may have been enough to meet such a rally with important negative divergences. These condition, plus the corrective Elliott Wave structure of the rally, does not bode well for a sustainable rally from current levels.

Nearby support remains at 880-879; a violation of that range would confirm that the rally from the April 21 reaction low had been reversed. A violation of that range would also make us more alert to the possibility that the post-March rally itself was in serious trouble. Beyond last week’s 929-930 rally high, next chart resistance is our 944 benchmark. Next Fibonacci resistance is the aforementioned 955-956 area.