13 Days

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On Thursday, the S&P 500 rallied 0.4%. This was the index’s fourth straight gain to begin 2010. Breadth was positive by a 3:2 margin and the up/down volume ratio was positive by better than 5:2. Total volume increased 6% to its highest level since mid December. The daily Coppock Curve was negative for 13 of the 24 S&P industry groups.

The above summary of Thursday’s action brings into focus three developments: 1) underlying strength over the past 13 days, 2) an increase in volume, 3) some erosion in momentum. The first two are related because the last time daily volume was higher than Thursday’s level was December 18, which was the first day the current 13-day run. Nonetheless, an examination of both the return over the past 13 days (4.2%) and underlying volume patterns suggests that the recent “strength” has been nothing to write home about. Both the 13-day rate-of-change and the volume patterns have essentially been in downtrends since at least their respective summer peaks and arguably since their March-April breakouts. This combination suggests that the market is experiencing underlying distribution and/or malaise.

It is also worth noting that we had do go back to 1995 in order to find a better string of gains over a 13 day period. History suggests that it typically does not get any better than 11 out of 13. That, together with the fact that there are initial signs of near term momentum deterioration, suggests that the breakout from the November-December Elliott Wave triangle is running out of steam.

S&P 13-day ROC and NYSE Volume Momentum

That being said, our near term focus remains on nearby support at 1115-1114; A decline through that range would do much to lock in the rally from December 9 as a complete pattern, which would satisfy the minimum requirements for perhaps two larger wave degrees of trend. Until that happens, we will continue to give the current trend the benefit of the doubt. Second support remains at 1086-1085.

Meanwhile, we have respect the possibility that the S&P has begun to decisively pull away from resistance at 1137. If so, then the potential nominally exists for a challenge of 1156. But with signs of deteriorating momentum, further strength may become increasingly difficult.