Wednesday, September 9, 2009

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.

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