The Road to Perdition …

On Monday, the S&P 500 broke a four-day losing streak with a rally of 1.5%. Both breadth and up/down volume ratios exceeded 7:1. A 21% decline in total volume was a dampening factor.

Despite the disappointing volume, the rally has two things going for it. The hourly chart suggests that the pattern has an impulsive look to it and yesterday’s high overlapped the 9/25 low. Thus we know that this rally cannot be a fourth wave. While it can still be a second wave within a pending third wave decline, those developments represent initial evidence that the overall decline from the 9/23 high will prove to be corrective. That, in turn, would help confirm that the S&P has some unfinished business on the upside and could still rally to or through the 1080 high.

Such a rally would be in line with the comments made in the just released monthly Insights. From our perspective, the wave pattern from the mid-August low does not look complete. Notwithstanding Murphy’s fourth corollary (the road to perdition is paved with those waiting for one more), it would seem that another new high is needed to satisfy the minimum requirements for a complete count of any kind.

S&P 500 Hourly

That said, in Friday’s post we observed that, while the hourly chart suggested that the decline from the 9/23 high is corrective, we would wait for the daily chart to confirm. Monday’s overlap was a step in the right direction, but further strength through last Tuesday’s high (1069.62) would effectively lock in a corrective decline.

With the above in mind, it needs to be noted that the S&P was “up close and personal” with the post-March uptrend line. Friday’s low was just below 1020, and the trend line was just below 1015. On Tuesday, that line is moving through the 1019-1020 area. Thus, a reversal decisively back below Friday’s low would violate both chart and trend support. Given the increasingly fragile momentum background, such a breach would be viewed with more than passing interest.

So far, the index has held indicated support in the 1036-1015 range. Indeed, Monday’s reversal and the aforementioned trend line add to the significance of this range. Nonetheless, it will still take a decline 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 at 1070-1080; second resistance is 1121-1156.

For those interested in such things, the March-June rally was 97 calendar days. October 13 will be 97 days from July’s low.