A Top, Not The Top

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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.