Thursday, January 28, 2010

A Linear Downtrend

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On Thursday, the S&P 500 fell 1.2%. Breadth was negative by 9:2 and the up/down volume ratio was in the red by a bit less than 2:1. Total volume increased by 3%. The daily Coppock Curve is negative for 22 of the 24 S&P industry groups and is positioned to remain negative for a majority of the groups for another week or so.

In our last post, we thought that the hourly chart had enough divergences to suggest that a five wave decline was complete and that the S&P had the potential to have a “bounce in its step” in coming days. Thus, Thursday’s decline to lower reaction lows complicates things a bit.

S&P 500

The inability of the hourly RSI to cross above the neutral “50” line (or the hourly Coppock Curve to cross above the neutral “zero” line) suggests that the downtrend from the January 19 high is a trending or linear pattern. Thus, the short term bias will remain down until the “500” crosses through the resistance downtrend line and/or the hourly momentum indicators cross above their respective neutral lines.

Meanwhile, Thursday’s action may have taken away some of the impulsive qualities of this decline. Or maybe it didn’t. We say that because the last three days show some overlaps on the daily chart. There are several counts that can account for this. The pattern could be moving toward the corrective end of the scale or it could be on the verge of a “3 of 3” downside acceleration. And there is evidence for both sides of that question and the impulsive quality of the decline is still very much in play. That said, we will let the market clarify things in coming days.

Regardless, the damage is done and, as mentioned in yesterday’s post, the second domino has fallen and the rally from at least the July low is complete.

The third domino is 1029-1020. That level represents the lows of the aforementioned October-November correction. A breach of that range, which we have used as tactical support, would confirm the completion of the post-March bear market rally. That range also lies between 1043-1010, which represents a 38.2%-50% retracement of the July-January rally. Therefore, it is not a stretch to suggest that tactical support is now first support.

First resistance is 1103. That level is both chart resistance on the hourly chart and can be counted as the second wave of prior degree. Second resistance is 1114-1115, which represents the recent breakdown point as well as a 38.2% retracement of the decline from January’s high.

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