It’s Not Over ‘til it’s Over, but…

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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.