Running Out of Steam

On Tuesday, the S&P 500 suffered its fourth decline in five sessions, with a loss of 0.2%. Declining issues were only 10% greater than advancing issues, but up volume was about 10% greater than down volume. Moreover, the index recorded a higher high and a higher low compared to Monday. In short, Tuesday’s results were “mixed.”

Taking the hourly chart at face value, we see a fairly clean five-wave 9/23-9/25 decline, followed by a subsequent three-wave rally. This suggests waves A and B, with a “C” wave decline to lower reaction lows yet to come. A decline back below 1041 will confirm both a “C” wave and a complete pattern from the September 2 low.

That said, the decline could be the “C” wave of a “flat” correction that began on September 17 at 1075. If so, a rally through 1075 would be a continuation of the larger rally pattern.

S&P 500 with Daily Coppock Curve
However, while the uptrends from both the March and July lows remain intact, near term momentum is weak. In fact, momentum has a bearish bias for 20 of the 24 S&P industry groups, and this majority bearish condition could persist into October. Thus, a quick rally through 1075-1080 will likely be met with a number of divergences that could very well transform a near term correction into an intermediate decline.

In addition, the fact that the current 22-week cycle is now 12 weeks old suggests that the post-July rally is running out of time as well as momentum – and waves. Thus, a rally to or through 1075 may only delay the inevitable.

The 9/23-9/25 decline was 38 S&P points. If 1041 is violated, we will be alert to the possibility that the resulting “C” wave will be 38-63 points in magnitude, Using today’s high near 1070 as a reference point, the potential "C" wave objective would be on the order of 1032 to 1007. That would be more than enough to violate the post-July uptrend line, but it would still take further weakness through 992-991 to lock in the July-September rally as a complete Elliott Wave pattern. The July low (869) continues to be tactical support.

First resistance is 1075-1080. Second resistance is 1121-1156.

Not a Last Gasp

On Monday, the S&P 500 rallied 1.8%, ending a three-day losing streak. The 8:1 positive breadth ratio was the best in five weeks, but total volume was the lowest in two months.

From an Elliott Wave perspective, the last several days have been very interesting. After peaking at 1080, we felt that the index had completed the pattern from at least the September 2 low or perhaps the August 17 low. Regardless, the evidence suggested that a significant reversal was not at hand, with important support in the 1048-1038 range. Since then, the index declined on five waves into Friday’s 1041 low (holding support) before today’s rally. And today’s rally, which retraced almost exactly 61.8% of last week’s decline, also has an impulsive look to it.

S&P 500



Since we see no conclusive evidence that the pattern from the September 2 low has been completed, we are going to continue to give it the benefit of the doubt. Thus, the potential for an impulse wave from last week’s low still exists. However, if the S&P fails to rally to new highs and/or establish an impulsive rally and then breaks back below 1041 it will lock in that post-September 2 uptrend as a complete structure and pave the way for lower reaction lows.

That said, and as mentioned in the recent STR, the uptrend for the bear market rally from the March low is intact, while both near and medium term momentum oscillators are still in positive territory. There are negative momentum divergences, but the Elliott Wave pattern has yet to deliver an acceptable count. Thus, despite mounting pressures, we believe that the S&P is not in position for a significant reversal.

Below 1041-1038, second support is apparent at 992-991. The July low (869) continues to be tactical support.

First resistance is 1075-1080. Second resistance is 1121-1156.

New "Short Term Review"

We have begun e-mailing a new Short Term Review. The first batch has been sent to those who replied to our "Kick-off" e-mail. The balance should be e-mailed by this time tomorrow.

We anticipate that an October monthly Insights will be out in the next week to 10 days.

If you would like a copy and are interested in becoming a charter subscriber, please send us an e-mail at wmgallc@gmail.com

Oil Spill

Editor’s note: A new Short Term Review has been e-mailed to our regular list. If you did not receive it, or are not on the list and would like a copy, please e-mail us at wmgallc@gmail.com. Our new subscription service is still several weeks away; please send inquiries to the same e-mail address.

On Thursday, the S&P 500 fell 1.0%. It was the first time since September 2 that the index posted consecutive losses. Breadth was negative by more than a 6:1 margin. However, volume declined by a marginal amount. All and all, this was very much in line with the downside follow through discussed in yesterday’s blog.

The sell-off allowed the index to tickle the upper reaches of first support at 1048-1038. Second support is at 992-991; a break of this range would be the first lower low on the weekly chart since the July low. The July low (869) continues to be is tactical support.
On an arithmetic scale a 50% retracement of the decline from the 2007 high to the 2009 low implies a challenge of 1121. Meanwhile, 1159 is the point at which the post-July rally will equal the March-June uptrend. Chart resistance (from the September 2009 reaction low is apparent in the 1155-1156 area. Thus, the 1121-1156 range is a potentially significant range.

Oil
Today we are giving the S&P short shrift in order to devote some space to oil, which fell 4.5%. This was its biggest decline in two months. Moreover, it broke down from an important top formation, reversed the uptrend from the July low, and violated the dominant P&F uptrend line that had been in force since April. As outlined in the STR, momentum is deteriorating and is in position to remain weak for most of the rest of the year. This, plus numerous unsuccessful tests of primary resistance in the 71-75 area, suggests that the breach of 67-66 signals a key reversal.

The P&F chart projects to 62, there is chart support at 64-62, and Fibonacci support (a 61.8% retrace of the post-July uptrend) at 65. So it seems safe to say that, despite today’s breakdown, there is still a good deal of support relatively close at hand. That said, if the 65-62 range is violated, the door would be open for a full test of the July low below 60 and, in turn, a confirmed reversal of the entire bear market rally pattern from last December’s benchmark low.

Resistance begins at 68-69 and is particularly strong in the 71-72 area.

A Fourth Wave Reversal

On Wednesday, the S&P 500 experienced a downside reversal day. The index meandered all morning, but then rallied to a new recovery high by mid afternoon. It then reversed course in the final 90 minutes to break below Tuesday’s intra-day low and finish with a 1.0% loss. Breadth was negative by a 15:4 margin.

The rally from Monday’s low to this morning’s high seems best counted as the fifth and final wave from the September 2 low. This, coupled with Wednesday’s “outside day, closing down,” suggests that there will be further downside follow through in the days ahead.

However, since the five-wave rally from September 2 is best counted as only the third wave from the mid August low, the anticipated downside follow though should be a fairly well-contained fourth wave decline that, in turn, should be followed a post-August fifth wave rally to another recovery high.

S&P 500

We used the phrase “well-contained” for four reasons. First, fourth waves typically do not retrace more than 38.2%-50% of the preceding third wave of the same degree. That range almost exactly encompasses the September 11-14 pullback from 1048 to 1035. Second, that same September 11-14 correction is currently best counted as the second wave within the five-wave September 2-23 rally. When, as in this case, the wave 1 rally is longer than both waves 3 and 5, the wave 2 correction is important support, even without Fibonacci considerations. Third, since the August 17-25 rally topped out in the 1037-1038 range, a coming pullback probably should not overlap that peak. Finally, the dominant post July uptrend line is current near 1038 and rising by about three points per day. So, in a perfect world, the anticipated follow through probably should be contained to the 1048-1038 area.

What if it doesn’t hold 1048-1038 range? The rally from August 17 to September 17 can be counted as a five wave pattern on the hourly (closing basis) chart. That would make the pattern since the September 17 high a counter trend correction that should have a Fibonacci relationship to that month-long rally. For reference, a 38.2%-61.8% retracement encompasses the 1038-1015 range. (Notice how 1038 shows up again). This would be our alternative scenario.

A break of second support at 992-991 would be the first lower low on the weekly chart since the July low. The July low (869) continues to be is tactical support.

On an arithmetic scale a 50% retracement of the decline from the 2007 high to the 2009 low implies a challenge of 1121. Meanwhile, 1159 is the point at which the post-July rally will equal the March-June uptrend. Chart resistance (from the September 2009 reaction low is apparent in the 1155-1156 area. Thus, the 1121-1156 range is a potentially significant range.

New Highs Will Not Mean “All Clear”

On Tuesday, the S&P 500 rallied 0.7%. The 11:5 positive breadth ratio almost reversed Monday’s 5:2 negative ratio. However, the 7:2 positive up/down volume ratio swamped the prior day’s 6:5 negative margin and the cumulative up-down OBV line recorded a new recovery high. In the sense that volume often leads price, these last two points are a sign that the underlying post-March ratio still has some life in it. Indeed, the uptrend lines from both the March low and the July low remain unchallenged.

The rally from yesterday’s low has an impulsive look to it and has locked in the September 17-21 decline as a corrective pattern. As a result, our inclination is to count the rally from yesterday’s low as the fifth wave of the rally from the September 2 low. In turn, the rally from September 2 would be the third wave from the mid August low. If this is correct, then a coming pullback should be a fairly well-contained fourth wave in preparation for a larger degree fifth wave run to yet another recovery high.

That said, such a recovery high could well mark the final leg of the pattern from not only the mid August low, but also from at least the July low. Thus, there is a case to be made that the Elliott Wave risk for an important top is growing. In addition, the weekly Coppock Curve for the S&P 500 has not confirmed the recent strength and is positioned to turn down again by mid October. If it does, it will likely have a bearish bias through the balance of the year. Moreover, the Bullish Percent Index is at its third highest reading in the history of our 12-year data base and is at levels last seen in early 2004 just before a multi-month correction. Finally, the rally from the July low is in its 11th week, suggesting that the 22-week cycle will be increasingly at risk of a top in the weeks immediately ahead.

S&P 500 with Current (and Projected) Weekly Coppock Curve
All and all, it is not much of a stretch to suggest that, even allowing for a higher high, it does not get much better than this. Thus, any such higher high is likely to be an ending, not an “all clear” signal.

A fourth quarter correction will likely be a Fibonacci retrace of – at worst – the post-March rally and it may only be a Fibonacci retracement of the post-July gain. To put that into perspective, a 38.2% retracement of the post-March uptrend would imply a 15% decline.

First support remain is at 1035; a breach of that level would confirm the end of the rally from the September low. A break of second support at 992-991 would be the first lower low on the weekly chart since the July low. The July low (869) continues to be is tactical support.

On an arithmetic scale a 50% retracement of the decline from the 2007 high to the 2009 low implies a challenge of 1121. Meanwhile, 1159 is the point at which the post-July rally will equal the March-June uptrend. Chart resistance (from the September 2009 reaction low is apparent in the 1155-1156 area. Thus, the 1121-1156 range is a potentially significant range.

A New Generation

Still in Philadelphia following the birth of our new granddaughter. All is well with everyone. Hope to be back in the swing of things tomorrow.

Baby Alert!!

Tomorrow my wife and I are headed to Philadelphia in anticipation of the birth of our first grandchild. I will have my computer with me, but e-mails and the Short Term Review will take a back seat to the advent of a new generation.

A Good Overbought "Ahead of the Fundamentals"

On Thursday, the S&P 500 fell 0.3%; this was only the second setback in 10 days. Breadth was negative by a 7:4 ratio, but the up/dn volume ratio was negative by only a 5:4 margin. Moreover, total volume was lower and the S&P recorded both a higher high and a higher low relative to Wednesday’s action. All post-March trends remain up.

We have pointed out that one has to go back to the early 1930s to find a time when the S&P rallied by as large a percentage in as short a time as it has since March. Friend and former colleague David Rosenberg, the Chief Economist at Gluskin Sheff in Toronto, put another spin on things this morning. We thought we would share it with you.

”Never before have we seen the stock market rise so much off a low over such a short time period, and usually at this state, the economy has already created over one million new jobs — during this extremely flashy move, the U.S. has shed 2.5 million jobs (as many as were lost in the entire 2001 recession). … By the time the U.S. stock market rallied 60% off the October 2002 lows, we were into July 2005. We were into the third year of the expansion. Go back to the onset of the prior bull market in October 1990 — by the time we were up 60%, it was January 1994! It took almost a year to accomplish this feat coming off the 1982 lows too and back then, we had lower interest rates, lower inflation, lower tax rates, lower regulation and an eight-year uninterrupted economic expansion to sink our teeth into.”

Without putting words in Dave’s mouth (he feels the market is “way ahead” of the fundamentals), we think his comments are another way of saying something we have been highlighting, i.e., the technical condition of the market is overbought, but it is a “good overbought.” Those examples were confirmed rallies, and higher highs followed (intervening corrections notwithstanding). Like those examples, the current evidence suggests that a coming correction will be followed by a return to or through whatever highs are made now. A second bear market to new lows is unlikely at this time.

S&P 1500 Sector Sum Indicator

But overbought is overbought, and a tradable correction could occur at any time. Such a correction should serve to work off the overbought condition and allow the various indicators to move to a healthier oversold condition. Our expectation is that such a correction will be a Fibonacci retrace of – at worst – the post-March rally and it may only be a Fibonacci retracement of the post-July gain. To put that into perspective, long time readers know that our usual expectation is for a correction to retrace at least 38.2% of the prior trend; such a retracement of the post-March uptrend would imply a 15% decline.

For trend reference, the pencil and ruler indicator shows that the post-March uptrend line is currently at 988, while the dominant uptrend from July’s low is now near 1023.

First support is indicated at 992-991. A break of that level would be the first lower low on the weekly chart since the July low. The July low (869) is tactical support and is likely to remain so for some time.

On an arithmetic scale a 50% retracement of the decline from the 2007 high to the 2009 low implies a challenge of 1121. Meanwhile, 1159 is the point at which the post-July rally will equal the March-June uptrend. Chart resistance (from the September 2009 reaction low is apparent in the 1155-1156 area. Thus, the 1121-1156 range is a potentially significant range.

A “Good” Overbought

On Wednesday, the S&P 500 rallied 1.5%. That was its best performance since August 21 and was supported by a breadth ratio in excess of 6:1 and an up/down volume ratio in excess of 5:1. Total volume increased by 10% over Tuesday’s level.

In Tuesday’s blog we suggested that we needed to be alert for an upside acceleration. That acceleration was apparent on Wednesday as the "500" rallied through an important resistance trend line. Thus, if Tuesday’s rally through 1053 invalidated the diagonal triangle (wedge) pattern from July’s low, Wednesday's follow-through above the resistance line would seem to seal the deal.

S&P 500

In addition to the trend line break, the rally has carried some indicators to new recovery highs. For example, the advance-decline lines for the S&P 500, 400, and 600 are all at new highs, as is cumulative NYSE volume (On-Balance Volume). Moreover, the Bullish Percentage Index for the broad-based S&P 1500 is now above its October 2007 level. Finally, the monthly Coppock Curve long term momentum indicator currently has a bullish bias for 23 of the 24 S&P industry groups (the exception is Diversified Consumer Services). There are other examples, but these demonstrate that, while the market is overbought, that condition will likely prove to be a “good” overbought. In other words, a coming correction is expected to be followed by a return to or through whatever highs are being made now. All of this buttresses our view that a second bear market to new lows is unlikely at this time.

That said, a correction is likely sooner rather than later. All good rallies come to an end, and a correction would serve to work off the overbought condition and allow the various indicators to move to a healthier condition. Our expectation is that such a correction will be a Fibonacci retrace of – at worst – the post-March rally and it may only be a Fibonacci retracement of the post-July gain. With that in mind, the post-March uptrend line is currently at 986, while the dominant uptrend line from July’s low is now near 1020.

None of this changes our view that the post-March pattern is corrective/counter trend.

First support is indicated at 992-991. A break of that level over the next two days would be the first lower low on the weekly chart since the July low. The July low (869) is tactical support and is likely to remain so for some time.

On an arithmetic scale a 50% retracement of the decline from the 2007 high to the 2009 low implies a challenge of 1121. Meanwhile, 1159 is the point at which the post-July rally will equal the March-June uptrend. Chart resistance from the September 2009 reaction low is apparent in the 1155-1156 area. Thus, the 1121-1156 range is a potentially significant range.

A Wedge No More

Editors Note: We have completed the distribution process for our latest Short Term Review. If you do not receive a copy please e-mail wmgallc@gmail.com to request one. On another note, the design process for our new website is well along and it looks like we may be able to roll out a static version by the end of the month. The interactive version may require a couple of additional weeks.

On Tuesday, the S&P 500 rallied 0.3%. This was its seventh gain in eight days and was supported by solid breadth and up/down volume ratios, as well as a 27% increase in total volume.

Those constructive statistics are all well and good, but the most important part of Tuesday’s rally was that the S&P broke above 1053. As a result, the potential diagonal triangle (aka a rising wedge) that we have been tracking from the July low has been invalidated. This development has at least three consequences in our view. It suggests higher highs; indeed, we need to be alert for a possible third wave acceleration. In turn, the prospects for a 50% retracement of the 2007-2009 bear market have improved. Finally, the breakout buttresses the view expressed in our new Short Term Review that, while the post-March “bull market” is really a bear market rally, a second bear market to new lows appears unlikely at this time.

All that said, the market is overbought. So a correction is due – even overdue. But the expectation is that such a correction will be a Fibonacci retrace of – at worst – the post-March rally; it may only be a Fibonacci retracement of the post-July gain. With that in mind, a violation of the post-March uptrend, which is currently at 983, would argue for the larger correction.

One final reminder before we discuss support and resistance. We have consistently said that the 2007-2009 decline is NOT impulsive. That is still our view.

First support is indicated at 992-991. A break of that level over the next three days would be the first lower low on the weekly chart since the July low. The July low (869) is tactical support and is likely to remain so for some time.

S&P 500 with 2007-2009 Retracement Levels

On an arithmetic scale a 50% retracement of the decline from the 2007 high to the 2009 low implies a challenge of 1121. Meanwhile, 1048 is the point at which the post-July rally was 61.8% of the March-June uptrend. Since the breach of 1053 implies higher highs, we respect the potential for further strength toward equality at 1159. Chart resistance (from the September 2009 (Lehman Brothers) reaction low is apparent in the 1155-1156 area. Thus, the 1121-1159 range has become significant.

New "Short Term Review"

A coming correction has the potential to be a Fibonacci retrace of the entire post-March pattern. However, the combination of “good” or confirming overbought conditions (much like early 2004), the bullish nine-month cycle, sentiment surveys continuing to show more bears than bulls, and long term momentum positioned to remain constructive into the second quarter of next year suggests that, while the post-March “bull market” is really a bear market rally, a second bear market to new lows appears unlikely at this time.

The above is the Plain English Summary for the S&P 500 contained in the Short Term Review that we began distributing earlier today. If you do not receive a copy please e-mail wmgallc@gmail.com to request a copy.

S&P 500 Hourly (Still Watching That Wedge)

1053 or Bust v2.0

Editors Note: As most readers of this blog are aware, it has been our intention to move to a subscription service in the early autumn. Over the past 24 hours, we have emailed those on our distribution lists detailing our offerings and the associated prices. If you did not receive that e-mail or are not on our lists, and would like to receive a copy, please send an email to wmgallc@gmail.com.

On Wednesday, the S&P 500 rallied 1.0%. That was its fifth straight gain; one has to go back to June 2007 to find a longer streak (and back to last November to find one as long). The breadth ratio was positive by more than 3:1. The up/down volume ratio, at almost 5:1, was even better and total volume expanded by 6.6%. The biggest bug-a-boo is that a majority of the 24 S&P industry groups have not outperformed the “500” in the past three sessions.

The S&P rallied to as high as 1044 on Thursday, which is well within the 1039(40)-1053 range mentioned in Wednesday’s post. This, plus the fact that the index is on a relatively uncommon five-day winning streak, suggests that the “500” could be on the verge of completing a diagonal triangle (aka a “rising wedge”) that has been in force since the July low. Diagonals are ending patterns, so this count implies that the rally from the July low could be the final leg (“C” wave) of a(n) (ABC) bear market rally from the March low.

Thus, all hands are on deck for a potentially important reversal. And, indeed, there are a number of divergences. For example, momentum peaked weeks (if not months) ago, the P&F Bullish Percent indicator has yet to exceed August’s high on any of S&P’s four major indexes (the 500, 400, 600, and 1500), and almost 200 of the stocks in the “500” are at least 5% below their respective ytd highs even as the “500 is at its own new high.

That said, AAII reported its fourth consecutive weekly survey where bears were equal to or greater than bulls. Moreover, we can make a case that the 22-week cycle still has a bullish bias. This allows for higher rally highs, or at least a limited decline.

S&P 500
With that in mind, a rally through 1053 would invalidate the wedge. Indeed, such a penetration (especially if it carries through 1058) would open the door for a challenge of 1120-1160. That range encompasses both a 50% retrace of the post-2007 bear market and the point at which the rally from the July low equals the March-June rally.

The uptrends from both the March low and the July low are still intact, but a decline through increasingly important first support at 980-970 would help lock in the rally from July’s low as a complete pattern and would put pressure on the post-March trend line. Below 980-970, support is indicated in the 954-934 range.

1053 or Bust?

On Wednesday, the S&P 500 recorded its fourth gain in a row with a rally of 0.8%. Once again, the breadth ratio was positive by a bit less than 3:1, but unlike Tuesday, when a large majority of the 24 S&P industry groups underperformed the “500,” Wednesday’s tally was 12 outperformers and 12 underperformers. Total volume fell, but by less than 3%.

The S&P rallied to the 1036 area before pulling back. While this was not enough to record a new rally high, it was enough to lock in the decline from the August 28 high as a corrective pattern. We had been suggesting that the decline from that high would prove to be a correction within, but not a reversal of, the larger post-March bear market rally trend. In fact, it appears to have been a correction within the post-July uptrend.

Daily Coppock Position for 24 S&P Industry Groups

That said, the market is not out of the woods. The rally from the July low could prove to be a wedge (a diagonal triangle in Elliott Wave terminology). Such a formation is an ending pattern and would be a signal that an important reversal was at hand. In order to make that possibility more of a probability, the rally from last Wednesday’s low should break above 1039-1040, but cannot exceed 1053. If it does, the rally will penetrate both important resistance and the trend line that has contained the wedge to date.

By definition, such a breakout would be a positive development. By contrast, a rally to the 1039-1053 area that is then followed by a reversal through 979-978 would be an indication of a reversal.

Obviously, the uptrends from both the March low and the July low are still intact, but a decline through increasingly important first support at 980-970 would help lock in the rally from July’s low as a complete pattern and would put pressure on the post-March trend line. Below 980-970, support is indicated in the 954-934 range.

The recent high was important from a Fibonacci perspective. That said, we continue to use 1015-1040 as our initial focal point. Based on the above, 1052-1053 is second resistance.

Stocks and the Dollar

On Tuesday, the S&P 500 recorded its third gain in a row with a rally of 0.9%. Although the breadth ratio was positive by a bit less than 3:1, the up/down volume ratio finished with a more anemic 5:4 positive margin. Among the 24 S&P industry groups, only nine outperformed the broad index, while 15 underperformed.

In our last post, we suggested that a rally much beyond 1010 – and especially through 1028-1029 – would weaken, if not eliminate, the potential for an impulsive decline. Since Tuesday’s high was 1026, the potential for a downside acceleration would seem to be diminishing. Put another way, the increased likelihood that this correction will prove to be a counter trend structure supports our view that it is a reaction within, but not a reversal of, the post-March bear market rally pattern.

The uptrends from both the March low and the July low are still intact, but a decline through increasingly important first support at 980-970 would help lock in the rally from July’s low as a complete pattern and would put pressure on the post-March trend line. Below 980-970, support is indicated in the 954-934 range.

The recent high was important from a Fibonacci perspective. That said, we continue to use 1015-1040 as our resistance focal point.

US Dollar Index

Beyond stocks, there was a lot of talk about the dollar index’s 1.2% decline. The bottom line is that this decline, by itself, did nothing to our view that the index is close to a bottom. Intermediate momentum is oversold and improving. Moreover, Tuesday’s setback had no impact on the point and figure chart. So while Tuesday’s setback does allow for additional weakness (perhaps toward 75.89) as the larger post-March decline runs its course, we continue to view the weight of the evidence in a positive light. A rally back through 78.94 will do much to confirm a bottom.

A Fourth Wave Pre-Holiday Rally?

Editor’s Note: September’s Monthly Insights has been released. If all goes well, this will be the final monthly report before we move to a subscription service. If you did not receive a copy and think you should have, or if you would like to be put on a list as a potential charter subscriber, send an e-mail to wmgallc@gmail.com. An e-mail with subscription details will be sent out in the next week or so.

On Thursday the S&P 500 gained 0.9% and broke a four day losing streak. Breadth was positive by a 4:1 ratio and the up/down volume ratio was positive by a 7:1 margin. However, total volume fell by 20% from Wednesday’s level, suggesting that there was an early get away before the long Labor Day weekend.

Hourly momentum has turned up, but daily momentum is overbought and deteriorating. This combination raises the possibility that yesterday’s rally was a fourth wave from the August 28 high. If so, we will need to be alert for a fifth wave decline. If such a decline develops – and especially if it breaks below 980-970 – the prospects would be for lower lows in the days and weeks ahead.

S&P 500

That said, if the S&P rallies much beyond 1010 – and especially if it pierces 1028-1029 – without first breaking below 992, then the potential for an impulsive decline will be weakened if not eliminated.

While the uptrends from both the March low and the July low are still intact, a decline through 980-970 would help lock in the rally from July’s low as a complete pattern and would put pressure on the post-March trend line. A break of tactical support at July’s 869 low would confirm a complete post-March pattern. Between 980-970 and 869 there is potentially strong intervening support in the 954-934 range.

The recent high was important from a Fibonacci perspective. This was reflected in our original 1007-1048 range but in the days ahead we will use 1015-1040 as our focal point.

Lower Lows

Editor’s Note: September’s Monthly Insights was sent out last night to our primary distribution lists. If all goes well, this will be the final monthly report before we move to a subscription service. If you did not receive a copy and think you should have, or if you would like to be put on a list as a potential charter subscriber, send an e-mail to wmgallc@gmail.com. An e-mail with subscription details will be sent out in the next week or so.

On Wednesday the S&P 500 recorded its fourth straight loss with a decline of 0.3%. Breadth and volume ratios were negative but by less than a 2:1 margin. This is quite moderate, especially when compared to Tuesday’s 9:1 down day.

The decline from the hourly high on the 27th has an impulsive look to it, and near term momentum has turned down for a majority of the 24 S&P industry groups. Moreover, the P&F Bullish Percentage indicator for both the S&P 1500 and the NDX has crossed below its 21-dma. All of this suggests that lower reaction lows are likely.

NDX Bullish Percentage Indicator with 21-dma

That said, the aforementioned momentum pressures are expected to persist into mid September, which is about the same time that a 10-week cycle low will be anticipated. While this suggests a general period of malaise over the course of the next 2-3 weeks, sentiment levels are not at excessively bullish levels. Indeed, our reading of the sentiment indicators suggests that there is a fairly large amount of skepticism by historical standards; this could help limit the downside potential.

Nonetheless, this is not a time for rose-colored glasses. The bear market rally from the March low retraced 38.2% of the 2007-2009 decline on arithmetic scale and 50% of that same decline on log scale. So a case can be made that that the S&P has done what it needed to do in order to correct the bear market.

In recent posts we said that a decline through 980-970 would make us nervous. At this point, however, all but the shortest of trends within the post-March structure are still up. The uptrend from the mid August reaction low at 979 has been reversed, but the uptrends from both the March low and the July low are still intact. However, a decline through 980-970 would help lock in a complete pattern from July’s low and would put pressure on the post-March trend line. A break of tactical support at July’s 869 low would confirm a complete post-March pattern. (That said, a test of the mid August low at 979-978 benchmark would represent an approximate 38.2% retrace of the rally from July’s low. Thus, a break of that range would imply further weakness to the 954-934 range, which encompasses a 50%-61.8% retracement of the entire July-August rally. This range could provide important intervening support.)

The recent high was important from a Fibonacci perspective. This was reflected in our original 1007-1048 range but in the days ahead we will use 1015-1040 as our focal point.

Bending, but Not Broken

On Tuesday the S&P 500 suffered its third straight loss – and its biggest in over two weeks – with a decline of 2.2%. Interestingly, the index was higher in the morning, so the resulting “outside day” implies some downside follow through. Moreover, Tuesday was a 9:1 day as both breadth and volume ratios were negative by more than 9:1.

Further weakness in the days ahead would not be surprising. In addition to the outside day, first support (1015-1001) was violated, as was the primary uptrend line from the mid August low from the perspective of the hourly charts on both an arithmetic scale and on a point and figure basis. Moreover, Tuesday’s decline carried the index through a 61.8% retracement of the post-August rally. This combination of Fibonacci and trend violations suggests that the index is positioned to fully test the mid August low at 979. If that test is not successful, then more serious trouble will likely lie ahead.

In Monday’s post we said that a decline through 980-970 would make us nervous because such a decline would violate both the mid August reaction low and the uptrend line from the benchmark March low. To that we would add that a test of the mid August low would also be an approximate 38.2% retrace of the rally from July’s low. Thus, a breach of the 980-970 range would imply further weakness to at least the 954-934 range, which encompasses a 50%-61.8% retracement of the July-August rally. The July low itself at 869 is still viewed as tactical support.

NYSE Bullish Percentage (top) and S&P 500

That said, we have consistently maintained that the rally from the March low is a bear market rally. So when the trend line from that low comes under pressure (especially if that pressure is derived from a five-wave decline), the potential exists for a return to the March low. However, we don’t think that recent weakness is the beginning of a full retrace to 666. The 22-week and nine-month cycles are still nominally bullish, sentiment shows a decent degree of skepticism, and a number of intermediate indicators do not have the negative divergences that often accompany a top. Thus, our inclination is to treat any additional weakness as a correction within, but not a reversal of, the post-March bear market rally pattern.

For quite a while we used 1007-1048 as an area of important chart and Fibonacci resistance. We subsequently adjusted first resistance to 1037-1058, with 1070-1081, and 1117-1127 viewed as second and third resistance, respectively. Those remain important levels, but we are putting them on the back of the stove. In the days ahead, we will use 1015-1040 as our front burner focal point.