If It’s Obvious, …

On Monday the S&P 500 fell 0.8%. The decline was significantly deeper in early trading, but a recovery – particularly in the final 30 minutes – helped pare the losses. Even so, breadth was negative by almost 5:1 and the up/down volume ratio was negative by more than 4:1. However, none of this erases the fact that the index gained 3.4% for all of August (which was the best August in nine years).

Is more weakness likely? Probably, but a significant decline from these levels seems unlikely. That said, we continue to believe that the uptrend from the March lows is a bear market rally and “stuff” will hit the fan in due course. But at present, there is a significant amount of bearish commentary (e.g., “Stocks in US Extend Worldwide Drop on Speculation Rally Has Gone Too Far” or “The Rally is Over”). Moreover, some of the better sentiment surveys (at least in our view) show more bears than bulls. In the words of Joe Granville, “If it’s obvious, it’s obviously wrong.”

A few days ago, we suggested that the S&P might be forming a triangle/wedge (from August 24). That remains a possibility, as does a “flat.” Both are continuation patterns, which would allow for another rally to new recovery highs. Moreover, intermediate momentum still has the potential to maintain a bullish bias into the end of September. And the trusty pencil and ruler suggest that the uptrend is still nicely intact. So, despite the protestations to the contrary, we are inclined to give the rally some leeway.

S&P 500 with Primary Post-March Trend Line
That said, a decline through 980-970 would make us nervous. Such a decline would violate both the August 18 reaction low and the uptrend line from the March lows. Our nervousness would increase if such a decline was a five-wave Elliott Wave pattern.

For now we will continue to use 1015(6)-1001 as first support, with the aforementioned 980-970 range viewed as second support. The July low itself at 869 is still viewed as tactical support.

Chart and Fibonacci resistance is indicated at 1037-1058, 1070-1081, and 1117-1127.

Plans for the coming week

There will not be a Short Term Review this week. Tomorrow is the end of the month, which necessitates an update and review of all of our monthly data files. In addition, we will likely be traveling from Massachusetts to NYC, then to Philadelphia, then back to Massachusetts during the week. Nonetheless,we plan to publish a monthly Insights before the week is out. We will also endeavor to keep the blog up and running as usual.

Once again, the blog saw a record number of unique visitors last week. Considering the fact that we are still in the lazy hazy days of August, we thank you for your continued interest. Pass it on.

FWIW, if all goes well, the coming Insights will be the last one before we migrate to a subscription service. An e-mail regarding our plans will be sent out shortly to our distribution list and will be transcribed to this blog.

Check Those Trend Lines

On Thursday the S&P 500 rallied 0.3%. This was its seventh gain in eight days and it was supported by positive breadth and volume ratios. (The DJIA, by the way, is on an eight day winning streak.) During the day, the index tested 1016 before reversing back up through most of its recent range.

In our most recent posts, we mentioned that, while a pullback to 1015-1001 would be fairly normal, we had to be alert to the possibility that the S&P would not make it to that range before reversing back to the upside. So it is possible that Thursday’s pullback to 1016 may be all we get.

S&P with Dominant Trend Lines

With that in mind, it is important to note that both daily and weekly momentum have recently turned up and both have done so while still on the overbought side of neutral. This type of behavior is often indicative of a linear uptrend. In such a case, an important top is often signaled when momentum turns down again and the trend line is breached. In the current situation, daily momentum implies a linear uptrend from the July lows (the blue line in the nearby chart) and the weekly indicator signals a linear uptrend from the March low (red line).

In the meantime, we still think that higher highs are likely before this post-March bear market rally runs its course. The Elliott Wave structure, momentum, and sentiment all support this view.

Under normal circumstance, the completion of the rally pattern from the August 17 low would imply the potential for a pullback into the 1015-1001 range. We will still keep an eye on that area, but the potential triangle we mentioned above is inherently a trading range and the S&P may not make it to as low as 1015-1001. Indeed, if our count is correct, the triangle may already be in the “D” wave position of its ABCDE structure. So, a breakout to new rally highs could happen sooner rather than later.

For now we will continue to use 1015(6)-1001 as first support. Regardless, it will take a full blown decline through 979-978 to suggest that something more serious is afoot. The July low itself at 869 is still viewed as tactical support.

Chart and Fibonacci resistance is indicated at 1037-1058, 1070-1081, and 1117-1127.

A Trend Interruption (Plus Sentiment)

On Wednesday the S&P 500 rallied 0.01%. However, both breadth and volume ratios were negative. More importantly from our perspective is the fact that the index traded to as low as 1022-1021 during the day. This violated, if only temporarily, the support levels encompassing 1027-1022 that we have mentioned in our last two posts. That was enough, therefore, to lock in the rally from the August 17 low as a complete pattern.

However, we still think that higher highs are likely. There are at least four reasons for that expectation. First the August rally can be counted as a five wave pattern, which suggests that it is the first leg of a larger rally. Second, the S&P has been range-bound for the past three days. This range appears to be taking form of a triangle, which is a continuation pattern. Third, momentum has a bullish bias. Finally, sentiment indicators on balance show more skepticism than belief. So Wednesday’s pressures were likely an interruption rather than a reversal.

Under normal circumstance, the completion of the rally pattern from the August 17 low would imply the potential for a pullback into the 1015-1001 range. We will still keep an eye on that area, but the potential triangle we mentioned above is inherently a trading range and the S&P may not make it to as low as 1015-1001. Indeed, if our count is correct, the triangle may already be in the “D” wave position of its ABCDE structure. So, a breakout to new rally highs could happen sooner rather than later.

Whether or not the index tests 1015-1001 remains to be seen. Regardless, it will take a full blown decline through 979-978 to suggest that something more serious is afoot. The July low itself at 869 is still viewed as tactical support.

Chart and Fibonacci resistance in the 1007-1048 range continues to be an important reference point. However, we have already mentioned that a rally from the 17th would be 61.8% of the prior July-August uptrend at 1070; equality would imply further strength toward 1127 (which is also a 50% retrace of the entire 2007-2009 decline). Moreover, a “second” leg following the completion of the current consolidation/triangle will be 61.8% of the August 17-25 rally at 1058; equality suggests 1081; and a 1.618 multiple would allow for 1117. So arguably we have three bands of resistance that encompass multiple Fibonacci relationships; the bands are 1048-1058; 1070-1081, and 1117-1127.

On another point, our reference above to skeptical sentiment would seem to fly in the face of yesterday’s Investors Intelligence numbers. Several websites mentioned that “II” bulls were over 50% while there were fewer than 20% bears. We have often said that sentiment indicators tend to be trend following and often need divergences (just like momentum) to give serious warnings of a price reversal. Indeed, historically the first overbought peak in the ratio of II bulls compared to the total of bulls and bears has rarely marked the end of a rally. So, we consider to the latest reading to be a yellow light at worst; it is not a red light.

More on the S&P (+ Consumer Confidence)

On Tuesday the S&P 500 rallied 0.2%. Both breadth and volume ratios were solidly positive – not great, but solid. The biggest bugaboo was that volume contracted by more than 8% from the prior day’s levels. That said, volume posted the third straight day above its 21-dma; that hasn’t happened in almost three weeks.

The S&P held above 1023-1022, so the Elliott Wave rally pattern from the August 17 low remains uninterrupted. However, hourly momentum continues to deteriorate, suggesting that the index is in need of a breather. Thus, we are going to raise our short term benchmark a bit, to 1027-1026. A break of that level would be hard evidence that the rally of the last six days has ended.

That said, the daily Coppock Curve momentum indicator has a bullish bias for 13 of the 24 S&P industry sectors. While that is barely a majority, we do think that this indicator will be constructive for most groups until around September 8. This, plus the fact that the weekly Coppock (i.e., intermediate momentum) is also constructive for most groups and many indicators have confirmed the rally (even as sentiment shows a fairly high level of skepticism), suggests that higher rally highs will follow a coming pullback.

S&P 30-Minute HLC
With that in mind, any pullbacks will likely prove to be well-contained and probably should hold at or above 1015-1001. It will take a full blown decline through 979-978 to suggest that something more serious is afoot. (Tuesday’s rally was likely part or all of an ending rally, not the beginning of a new upleg.) The July low itself at 869 is still viewed as tactical support.

Chart and Fibonacci resistance in the 1007-1048 range has already proven itself. However, we expect that the rally from August 17 will eventually break out through this range. That is because a rally from last Monday’s low would be 61.8% of the prior July-August uptrend at 1070; equality would imply further strength toward 1127 (which is also a 50% retrace of the entire 2007-2009 decline).

On another note, the always astute media attributed some of Tuesday’s enthusiasm to the uptick in consumer confidence. That “reason” was probably as misplaced as was the prior month’s pessimism following a “surprising” downtick. Nothing goes straight up (or down); even strong rallies have pullbacks along the way. The bottom line is that even a modest further gain next month will generate a P&F “buy” for consumer confidence.

More to Come

Editor’s Note: On Monday we released a Short Term Review, which includes comments on stocks (US and global), yields and bond prices, the dollar, and both gold and oil. If you'd like a copy and think you might be interested in becoming a charter subscriber to our newsletters and daily comments, please e-mail us at wmgallc@gmail.com.

On Monday the S&P 500 fell by less than 0.1%. This modest setback was enough to break a four-day winning streak and probably reflected the fact that breadth was negative by a 6:5 ratio.

That said, volume was positive by a 7:4 ratio. This continues a rather consistent characteristic of this rally – volume has generally been constructive (even on “down” days). A change in this behavior could be an early warning of a reversal.

Yesterday afternoon’s decline probably marked the end of the first leg of a larger rally that began on August 17. We say that because we can easily count a five-wave pattern on the hourly chart and momentum on that same chart appears to have clearly reversed to the downside. A decline on Tuesday through the 1023-1022 area would help confirm a complete pattern from the low on the 17th.

S&P 500 Hourly

That five-wave rally from August 17 should prove to be the first leg of a larger pattern. We say that because the internals (breadth, volume, momentum, and sentiment) are not at levels that typically accompany a top. Indeed, there are more “good” overbought readings than not. In addition, the Fibonacci relationships are not indicative of a top.

All and all, any follow-through from yesterday afternoon’s pullback should hold at or above 1014-1000. However, it will take a full blown decline through 979-978 to suggest that something more serious is afoot. The July low itself at 869 is still viewed as tactical support.

Chart and Fibonacci resistance in the 1007-1048 range has proven itself within recent weeks. However, we expect that a continuation (a third wave?) of the rally from August 17 will breakout through this range. A rally from last Monday’s low would be 61.8% of the prior July-August uptrend at 1070; equality would imply 1127 (which is also a 50% retrace of the entire 2007-2009 decline).

New STR

Editor’s Note: There is a great conference for professional technical analysts from all over the world being held in Chicago on October 8-11. It is open to anyone who is interested in technical analysis and will be a great opportunity to learn about some of the latest developments in the field. Please see www.ifta2009.com for more details.

Last week’s low locked in the initial July-August rally as a complete pattern, so the rally later in the week is viewed as the beginning of a second leg (a likely “C” wave) in a larger post July rally. Moreover, sentiment continues to show a healthy level of skepticism and the point and figure Bullish Percentage indicator is at a post-March high for both the DJIA and the S&P 500. All of this suggests that higher highs are yet to come in this post-July (and post-March) bear market rally pattern.

The above is a tidbit from the just released Short Term Review, which includes comments on stocks (US and global), yields and bond prices, the dollar, and both gold and oil. If you'd like a copy and think you might be interested in becoming a charter subscriber to our newsletters and daily comments, please e-mail us at wmgallc@gmail.com.

It’s Not Over ‘til it’s Over, but…

Editor’s Note: There is a great conference for professional technical analysts from all over the world being held in Chicago on October 8-11. It is open to anyone who is interested in technical analysis and will be a great opportunity to learn about some of the latest developments in the field. Please see www.ifta2009.com for more details

On Thursday the S&P 500 rallied 1.1% for its third straight winning session. Both breadth and volume were solidly positive. So, after Monday’s breakdown from a two-week trading range, the S&P has managed to recover and is now tickling the lower end of long standing resistance.

From the beginning we felt that the breakdown signaled a correction within the incomplete uptrend from July’s low and would be followed by a subsequent rally to higher highs. However, we also felt that the correction would retrace at least 38.2% of the July-August gains.

At this point, we have to acknowledge that all we may see is the 23.6% retracement that has already been established. If so, that would be a sign of strength and be in line with the solid breath and volume numbers that have been delivered since Monday.

That’s not to say that the index is out of the woods and that the correction is over. As of Thursday’s close, 267 of the stocks in the S&P 500 were more than 5% below their year-to-date high. A similar number is still below last Friday’s close (the day before the breakdown). And, given our recent post on On-Balance Volume and the concept that volume leads price, it should be noted that over 440 of the S&P’s components are currently below their y-t-d OBV peak.

These statistics suggest that the correction from last week’s high may not be over and that a 38.2% retracement of the July-August gains is still possible. That would imply a test of the 961 area. Even if the correction is over, the potential for significant negative divergences has risen.

Chart and Fibonacci resistance in the 1007-1048 range has proven itself within recent weeks. If the correction from August’s peak is over, we would expect that range to be violated. That is because a rally from last Monday’s low would be 61.8% of the July-August uptrend at 1070; equality would imply 1127.

Monday’s 979 low has become first support, with the aforementioned 961 area viewed as second support. The July low itself at 869 is still viewed as tactical support.

China is Toast

Editor’s Note: There is a great conference for professional technical analysts from all over the world being held in Chicago on October 8-11. It is open to anyone who is interested in technical analysis and will be a great opportunity to learn about some of the latest developments in the field. Please see www.ifta2009.com for more details

The title of today’s blog is a phrase that we used many months ago at an institutional meeting. Our feeling at the time was that China was a bubble and that the bubble had burst. In that sense, the fact that the Shanghai Composite lost 72% of its value in a year was a normal development, as was the subsequent 38.2% retracement rally that appears to have ended earlier this month.

As a result of the current decline, most (if not all) of the trend lines from last December’s test of November’s low have been violated, momentum is weak, and the pattern is orderly and impulsive. Moreover, sentiment is still bullish and this month's decline has already retraced 38.2% of the November-August rally. All of this suggests that this new downtrend will probe lower lows. We would not be surprised if the November lows are tested (and even violated), but we will pay attention to the 50% retracement level (2589) and the 61.8% level (2381) as potential roadblocks along the way.

China's Shanghai Composite


Meanwhile, the S&P 500 rallied 0.7% on Wednesday. Breadth was moderately positive, but volume was flat. Hourly momentum is in overbought territory even as the daily Coppock oscillator has a bearish bias for 22 of the 24 industry groups. These pressures still appear positioned to remain in force into the end of the month. Thus, we remain inclined to look for lower reaction lows before the post-July uptrend regains its footing.

A break of the 961 support area would imply further weakness toward Fibonacci (50%-61.8%) and chart support in the 944-926 range. The July low itself at 869 is still viewed as tactical support.

Chart and Fibonacci resistance in the 1007-1048 range had become increasingly stubborn and appears to have finally repelled the rally from July’s low. By definition, it is now benchmark resistance.

Troubles

For whatever reason, I am unable to publish the usual blog. We'll keep trying and post when we can. FYI, the title is "China is Toast."

Resiliency

Editor’s Note: On Monday we released a new Short Term Review. If you did not receive it and think you should have, let us know through wmgallc@gmail.com. Similarly, if you are not on our list and would like a copy (and think you might be interested in becoming a charter subscriber) send an e-mail to the same address.

On Tuesday the S&P 500 rallied 1.0%. While this was a bounce compared to Monday’s 2.4% sell-off, the market’s internal strength recovered a good chunk of the prior day’s losses. For example, 23 of the 24 S&P groups fell on Monday, but 22 rallied on Tuesday. Total volume declined on Tuesday, but up volume was 85% of the total, whereas down volume was 91% of the total on Monday. And the bullish percentage for the S&P actually gained ground on Tuesday.

S&P Hourly with Post-July Fibonacci Retracement Levels
One day does not make a trend, and we are not saying that Monday is proving to be a non-event. But Tuesday’s internals are signs of resiliency and are in line with our observation in our last post that the combination of pattern, breadth, momentum, and volume going into the recent high suggest that even higher highs are still to come.

That said, the new downtrend from last week’s high does not appear complete. Hourly momentum confirmed Monday’s low and the daily Coppock has a bearish bias for all 24 industry groups. All told, these pressures appear positioned to remain in force into the end of the month. Moreover – and as mentioned in recent comments – we typically expect at least a 38.2% retracement of a prior trend; this would imply a test of the 961 area. On balance, therefore, we are inclined to look for lower lows before the post-July uptrend regains its footing.

A break of the aforementioned 961 support area would imply further weakness toward Fibonacci (50%-61.8%) and chart support in the 944-926 range. The July low itself at 869 is still viewed as tactical support.

Chart and Fibonacci resistance in the 1007-1048 range had become increasingly stubborn and has repelled the rally from July’s low. By definition, it is now benchmark resistance.

A Top, Not The Top

Editor’s Note: Last week a record number of people visited our blog. That’s not bad for a lazy August week, so thank you for your continued interest. In addition, we have released a new Short Term Review. If you did not receive it and think you should have, let us know through wmgallc@gmail.com. Similarly, if you are not on our list and would like a copy (and think you might be interested in becoming a charter subscriber) send an e-mail to the same address.

On Monday the S&P 500 fell 2.4%, which was its biggest decline since July 2. Moreover, breadth and volume pressures were intense enough to generate a 9:1 down day (both declining issues and down volume were at least 90% of total up/down issues and total up/down volume, respectively). And, of course, the S&P broke below 990, ending a two-week trading range and locking in the rally from the July low as a complete Elliott Wave pattern.

So now what? First of all it is quite easy to count five waves up from the July lows on a daily HLC chart. Moreover, the 10-day ratio of advancing stocks to the total of up/down stocks hit its second highest level in our 27-year database. The same can be said for the weekly Coppock Curve. Finally (and as mentioned in a recent blog), On-Balance Volume is viewed in a favorable light. This combination of pattern, breadth, momentum, and volume suggest that higher highs are still to come.

S&P with 10-day Breadth Ratio

Yesterday we were asked if there is a pattern that would indicate that yesterday’s reversal was the top. If there is, we don’t see it. In addition to the evidence above, the corrective nature of the March-June rally suggests that the overall pattern from July’s low should also be corrective. The biggest arguments for the top at these levels are: 1) the S&P retraced almost exactly 38.2% of the bear market and 2) the 22-week cycle may have peaked. Of course, anything is possible but the weight of the evidence would seem to argue again a post-March reversal.

We have consistently suggested that a completed July-August rally pattern would likely prove to be part of a still larger uptrend from that same July low. That is how we will count it in the days ahead. A 38.2% retrace is usually a minimum expectation, implying a test of the 961 area. Below that, Fibonacci (50%-61.8%) and chart support is apparent in the 944-926 range. The July low itself at 869 is still viewed as tactical support.

Chart and Fibonacci resistance in the 1007-1048 range had become increasingly stubborn and appears to have finally repelled the rally from July’s low. By definition, it is now benchmark resistance.

"Positively" Boring

On Thursday the S&P 500 rallied 0.7%. Once again, breadth and volume ratios were solidly positive. The index closed at a new rally high, but failed to make a new high on an intra-day basis. Meanwhile, both the DJIA and the NASDAQ recorded an inside day (a lower high and higher low than those seen on Wednesday).

As the nearby chart shows, the S&P has been in a tight range (992-1017) for nine days. Interestingly enough, the daily Coppock Curve peaked nine days ago. In recent months, most daily Coppock trends have lasted 7-16 trading days, so a case can be made that the current momentum pressures may still need more time to pan out.

S&P Hourly with Hourly & Daily Coppock Curves

That said, the pressures of the past nine days have proven to be a time correction, rather than a price correction. The resulting consolidation has not damaged the trend and may yet prove to be a continuation pattern within the post-July rally. Under this scenario, the end result could prove to be a net positive. So, even though the past two weeks can be viewed as boring (and increasingly difficult to write about), they may turn out to be “positively” boring.

In the meantime, we will stick with our recent parameters. The potential still exists for continued probing of increasingly stubborn chart and Fibonacci resistance in the 1007-1048 range.

Conversely, a violation of 991-990 would lock in the rally from the July 8 low as a complete pattern. That said, the July low itself at 869 is still viewed as tactical support.

Potential Divergences Are Cropping Up

On Wednesday the S&P 500 rallied 1.2%, recovering most of Tuesday’s 1.3% loss. Breadth and volume ratios were solidly positive. Overall, the index is very close to setting new rally highs.

That said, divergences are beginning to crop up. For example, both near and medium term momentum indicators remain under pressure. The dollar index is well above its recent low and the Baltic Dry Index is well below its June high. Meanwhile, almost half of the stocks in the S&P are more than 5% below their ytd high and one-quarter are at least 10% below their ytd high. There is also a number of currently minor point and figure diverges; however, the longer they persist, the more important become.

S&P 500 and Baltic Dry Index
All of this is at least initial evidence of a narrowing of the rally. Fatigue is becoming more evident. A surge will eliminate some of these divergences, but not all. So the seemingly one-sided array of confirmations that existed a week or two ago is not so one-sided any more. There are cracks in the armor.

These signs of fatigue do not rule out higher highs over the near term and the divergences will only be potential divergences as long as the trend continues higher. Thus, until the index reverses and breaks back below at least 991-990 the market can still overpower these potential divergences. But the current conditions are signs of possible change.

With the above in mind, the door remains nominally open for continued probing of chart and Fibonacci resistance in the 1007-1048 range.

Conversely, a violation of 991-990 would do much to lock in the rally from the July 8 low as a complete pattern. That said, the July low itself at 869 is still viewed as tactical support.

Do You Feel Lucky?

Editor’s note: It has come to our attention that, in the August 7 post where we announced the release of our monthly Insights, there was a typo in the e-mail address. So, if you requested a copy and did not receive one, that’s probably why. Try again at wmgallc@gmail.com and we will send out a copy ASAP.

On Tuesday, the S&P 500 fell 1.3%. That was its fourth decline in five days and the largest since before the July 8 tactical low. Both breadth and up/down volume were negative by about a 4:1 ratio. Finally, it is worth noting that near term momentum is deteriorating for 23 of the 24 S&P industry groups – but 22 of those are still on the overbought side of neutral. (The “bullish” exception is the overbought bank group.)

Monday, we raised first (trading) support to 990.22. On Tuesday, the S&P traded to as low as 992.40. That’s close, but no cigar. Our rationale for raising support was that a breach of that level would lock in the rally from the July low as a complete pattern on our weekly chart. And that is where it gets interesting.

A violation of that support level would also do much to lock in a corrective pattern on the daily chart. So, all of a sudden, the potential for a significant reversal would increase. This potential would be bolstered by the idea that the current near term momentum pressures are positioned to dominate through the balance of the month and put added pressure on medium term momentum (which still has the potential to remain weak through the quarter).

S&P 500
So let’s put this in perspective. The S&P has retraced almost exactly 38.2% of the 2007-2009 decline bear market. What if the rally is not finished and the S&P moves to a 50% retrace? Then we’ll see 1121. What if it retraces 61.8%? Then we’ll see 1229. But what if we are correct and this “new bull market” is really a bear market rally? Then this post-March uptrend will be followed by a decline to something below 667 in the months ahead. So, if we allow for the best case rally scenario, the potential is for a bit more than 200 S&P points from here. Again – that’s the probable best case. On the other hand, we view a coming test of 667 as a probable minimum expectation. Thus, from current levels, the downside risk already outweighs the upside potential by a significant margin. And that is comparing an unlikely best case upside scenario to a very likely downside potential. Now is not the time to become overly bullish.

To repeat: a violation of 990.22 would do much to lock in the rally from the July 8 low as a complete pattern. That said, the July low itself at 869 is still viewed as tactical support.

Meanwhile, unless and until 990.22 is breached, the door remains nominally open for a deeper probe of chart and Fibonacci resistance in the 1007-1048 range.

Ho Hum (Plus the US$)

On Monday, the S&P 500 recorded its third setback in four days. However, while breadth was negative, the up/down volume ratio was positive for the eighth day in a row (and for 13th time in the last 14 days). Nonetheless, it was something of a “ho-hum” day as both the S&P and the DJIA recorded an inside day (a higher low and lower high than those seen on Friday).

Neither the daily nor the weekly chart has much definition to it from the July 8 low – they are simply a continuous pattern of higher highs and higher lows. This is elementary evidence that the 4-5 week long rally is still intact. However, we can make the case that the hourly chart is now in its seventh wave up from that same July low. That is a corrective number of waves. While this suggests that the rally is running into difficulty, we need to allow for the possibility that the fifth wave itself is subdividing into five lpwer degree waves of its own. However, even if that is the case, both near and medium term momentum have a bearish bias, suggesting that that any further upside over the near term will be laborious. An accelerating rally appears unlikely.

With all of this in mind, we are raising first (or trading)support from 969.65 to 990.22. A violation of that latter level would be the first lower low since July 8 and do much to lock in the rally from the July 8 low as a complete pattern. That said, the July low itself at 869 is still viewed as tactical support.

Meanwhile, the door remains open for a still deeper probe of chart and Fibonacci resistance in the 1007-1048 range.

Now let’s turn to another subject – the dollar. In our recent monthly we suggested that a rally through 79.66 – and especially through 81.47 – would effectively confirm that the decline from the March highs had been reversed. In turn, this would imply that the dollar index could be on the verge of its best rally since the 15% gain from December 2008 to March 2009 (and perhaps since the 24% rally from the July 2008 low). On Monday the dollar “only” got to as high as 79.39, but near term momentum has turned up and the downtrend line from early July has been breached. A rally through resistance may only be a matter of time.

If Volume Leads Price …

We have completed the distribution of August’s monthly Insights. If you should have received a copy and did not, let us know (wmgallac@gmail.com). Similarly, e-mail us if you would like to be put on our list as a potential charter subscriber.

On Thursday, the S&P 500 fell for the second straight day with a loss of 0.6%. Breadth was negative, but the up/down volume ratio was positive.

We originally became interested in technical analysis many moons ago because of Joe Granville. He was the guru of the moment. We were a fundamental director of research and were curious as to how he did what he did. So in a sense, our study of Granville’s On-Balance Volume was a precursor to our studies of the Elliott’s Wave Principle.

We mention this because we still do keep an eye on OBV. For various reasons, we nightly compute the total up and down volume statistics for the common stocks listed in the NYSE Composite index. In recent days, the up/down volume ratio has been positive even though breadth and the indexes have been negative. Moreover, the OBV line (the daily cumulative difference between up and down volume) has penetrated its downtrend line from the 2007 highs. Finally, the OBV line from the July reaction low is approaching 50% of the prior March-May line. A 61.8%, or even 100%, relationship would not be surprising.

NYSE Common Stock On-Balance Volume
Granville and others have always maintained that volume leads price. But the bottom line is that this is another example of an indicator that is not diverging from the movements of the S&P. Put another way, this OBV “confirmation” suggests that higher highs are still likely.

This would be in line with our observations that the July-August rally is a five-wave Elliott Wave pattern, which suggests that it is likely the first leg of a larger uptrend. Thus, the current pullback should prove to be only a pause in a still incomplete bear market rally pattern. As such, the door remains open for a deeper probe of chart and Fibonacci resistance in the 1007-1048 range.

While a violation of 958.65 would lock in the rally from the July 8 low as a complete pattern or “wave,” the July low itself at 869 is still viewed as tactical support.

Monthly Insights

There was no blog yesterday. In the evening, my wife and I watched our niece help her New Jersey Womens Professional Soccer League team win another game on their march to the playoffs. Most of the day was spent working on our Monthly Insights.

Insights has been sent to those on our preferred distribution lists. To avoid spam difficulties, we will continue the process with our other lists later today and tomorrow. E-mail me (wmgallc@gmail.com) if you would like to be on our preferred list as a potential charter subscriber or if you think you should have received a copy and did not.

As an FYI, the report's front page summary contained the table shown below.

Is That All There Is?

On Tuesday the S&P 500 started slowly, but finished with a bang (or at least a pop). The index recorded its fourth straight gain with a rally of 0.3%. Once again, both breadth and volume ratios were solidly positive. In addition, the late day pop allowed the index to enter the important 1007-1048 resistance range.

We have made the case in recent posts that the rally from last Wednesday’s low at 968.65 is best counted as the fifth wave from the July 8 bottom. Thus, 968.65 is an important benchmark; a break of that level would indicate that the July-August rally is complete.

15 Minute Chart of the S&P 500

That said, we can now count a full five wave sequence up from the July low. The “look” leaves something to be desired and we prefer to think that the S&P is not that far along, but a five wave count is possible. At the same time, we would note that only 97 of the 500 stocks in the S&P made a new ytd high on Wednesday, despite the fact that the index itself made a decisive new recovery peak. Indeed, over 200 of the index’s components are more than 5% below their ytd high. This narrow participation is a sign of fatigue that, together with the possible five wave pattern, puts us on alert. In addition, the deteriorating Coppock condition described in previous posts is another near term cause for concern.

If the index is completing the rally from last Wednesday’s low, then a decline decisively through the 986 area would be an early warning sign. Nonetheless, and as stated earlier, we will continue to give the rally the benefit of the doubt as long as the index holds above 968.65. As long as that is the case, the door remains open for a deeper probe of chart and Fibonacci resistance in the 1007-1048 range.

A violation of 968.65 would indicate that the entire rally pattern from at least the July 8 low was complete.

Looking for the Pause that Refreshes

On Monday, the S&P 500 gained 1.5%. Upside volume recorded a 9:1 day versus downside volume, but breadth statistics failed to record a similar margin. Thus, the day as a whole was not a 9:1 event. Nonetheless, there have only been three times in the 18 days since the July low where the S&P has recorded a lower low than the day before.

As mentioned in yesterday’s post, it doesn’t get any better than this. And that may be a reason to anticipate a pullback. In that vein the daily Coppock appears to have peaked and we are inclined to count the rally from last Wednesday’s low as the fifth wave up from the July 8 bottom. Historically, a falling Coppock tends to be under pressure for 2-3 weeks. Thus, the first half of August could be rather disappointing, especially when compared to July’s robust performance. However, such a pullback may prove to be only a pause in a still incomplete bear market rally pattern.

S&P Groups with Bearish Daily Coppock Curve

We will give this current “last gasp” from last week’s reaction low the benefit of the doubt as long as the index holds above 968.65. As such, the door remains open for a challenge of chart and Fibonacci resistance in the 1007-1048 range.

A violation of 958.65 would be an indication that the entire rally pattern from at least the July 8 low was complete.

Be Careful Out There …

… it doesn’t get any better than this.

We’ve just completed updating all the daily, weekly, and monthly files in our database in preparation for writing the monthly Insights. We typically don’t write a blog on Sundays, but we were struck by the fact that many of the daily files don’t often get more one-sided than they are now. For example, all 10 of the S&P sectors are on P&F buy signals. The last time that happened was the summer of 2007. Similarly, all 24 S&P industry groups have a bullish bias from the perspective of both the daily Coppock and the daily MACD; the last time that happened was October 2007. There are more, but you get the picture.

While all of this is going on, we can count five waves up on the S&P from the July low. At the same time it appears that the daily Coppock has peaked. (The weekly Coppock Curve still has the bearish bias that first became evident in June.)

So, while there is a case to be made that a coming pullback will only be a pullback within the uptrend from the July lows, now is not the time to bet the farm.

That said, we will give this current “last gasp” from Thursday’s low the benefit of the doubt as long as the index holds above 968.65. As such, the door remains open for a challenge of chart and Fibonacci resistance in the 1007-1048 range.

A violation of 958.65 would be an indication that the entire rally pattern from at least the July 8 low was complete.