An Inside Day Plus the Dollar

December’s monthly Insights has e-mailed to our subscribers; it is also available to subscribers on our website. A subscription to our market letters is available through the website (www.wminsights.com). This blog will remain as is for a few more weeks, but will eventually be moved to the website for subscribers only. At that point, this page will remain, but the content will be a brief summary of the full website post. If you have any questions please e-mail us at customerservice@wminsights.com.

On Monday, the S&P 500 fell 0.2%. Declining issues were less than 10% greater than advancers and the up/down volume ratio was negative by about 4:3. Total volume fell by 33% from Friday’s five-week high. The daily Coppock Curve still has a bearish bias for 19 of the 24 S&P industry groups.

Following successive outside days on Thursday and Friday, Monday was an inside day (neither its high nor the low exceeded those seen on Friday). This suggests that, following the volatility of the prior two days, Monday was either a rest day or a day of indecision. That said, there are signs of potential positive divergence on the hourly chart. We say “potential” because they have not been confirmed yet and the downtrend from Friday morning’s high is still intact. Moreover, even if a rally does develop, it probably will not last too long given that the daily and weekly momentum indicators still have a bearish bias.

As a result, there are no meaningful changes in our support and resistance benchmarks. The S&P remains above 1087-1084. Since that range has repelled all setbacks over the past several weeks, we will continue to give the November-December uptrend the benefit of the doubt. Until the 1087-1084 range is broken, the door is still open for a more serious test of the 1121-1156 range that we have highlighted as a significant resistance area. As it is, last week’s recovery high came within 0.2% of that range. Conversely, a breakdown would allow for further weakness to at least 1081-1062 (a 38.2%-61.8% retracement of the overall pattern from the November 2 low). However, our primary focus for support is still on 1029. A break of that level would confirm that the post-July rally is over.

US Dollar Index (with the S&P 500 in the Background)

Meanwhile, the dollar may finally be acting as if it wants to begin the long-anticipated rally. We have been making the case that intermediate momentum for both the index and for the dollar versus most of the currencies within the index (including the euro) was bottoming or had bottomed, Moreover, sentiment has been (and still is) excessively bearish by historical standards and the wave count is corrective. Against this backdrop, the dollar index has rallied through what can be considered the dominant downtrend lines from both the March high and the July reaction high.

While we respect the possibility that the dollar index is bottoming, our focus remains on the parameters mentioned in December’s monthly Insights. Our immediate focus is on 76.82. A rally through that level will allow us to count the post-March decline as a complete pattern; that, in turn, would satisfy the minimum requirements for a complete 13-month ABC. As for support, the index has traded to as low as 74.23, which is solidly within the 74.30-73.90 support range. Beyond that lies 2008’s double bottom at 70.31-70.70.