A Domino Falls

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On Wednesday, the S&P 500 fell 1.1%. Breadth was negative by 11:2, which is the most negative margin since late November. Up/down volume was also negative, but by a more modest 10:3 ratio. However, volume increased by 3%. The daily Coppock Curve is negative for 20 of the 24 S&P industry groups.

The S&P 500 declined by over 1% in two of the past three days and gained 1% on the other. Volume increased on the two down days but fell off on the up day. All of this suggests a bout of distribution.

The index broke below 1130 on Thursday. This effectively locked in the rally from the December 9 low as a complete pattern. Since that rally can be counted as the “C” wave of an ABC uptrend from the November 2 low, it is therefore possible to count the November-January pattern as having ended. And, since we have been treating the post-November structure as the final leg (i.e., the “E” wave) from the March lows, it is now possible to suggest that the minimum requirements for a complete “bull market” pattern have been satisfied. In recent comments, we have described this as a potential domino effect. If this proves to be correct, then the risk is that Thursday’s relatively modest setback will have an impact on increasingly larger wave degrees.

S&P 500

That said, the S&P still has a lot of work ahead of it to knock over the next domino, which requires a break below the December low itself at 1086-1085. Such a break would, at a minimum, lock in the rally from the July low (and possible the March low) as a complete pattern. Since 1086-1085 is not even close to a 38.2% retracement of the post-July rally, a breach of that range would likely imply importantly lower lows.

All that said, it is possible to count the range of recent days as a triangle. If so, then the S&P may still have a final last gasp rally left in it. But given the toppled domino, as well as the momentum and sentiment concerns mentioned in recent comments, the upside potential is likely a fraction of the downside risk. As mentioned in the recent STR, this is not the time to be committing new funds to the equity market.

With the rally from December 9 now complete, Fibonacci support is indicated in the 1126-1111 range. The 1118-1111 range also includes potentially strong chart support. A violation of these levels will open the door for a move to 1086-1085.

There is now a triple top at 1150, so a breakout through 1150 would allow for further strength toward 1158. As mentioned in many past comments, the 1121-1158 range involves a number of important Fibonacci relationships. As a result, a breakout through that range would be, almost by definition, a bullish development.