Bending but Not Yet Broken

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It could have been worse.  On Thursday, the S&P 500 finished the day with a loss of 0.2% after having been down as much as 1.7%.  Despite a solid afternoon recovery, both breadth and the up/down volume ratio were negative by a 9:8 margin.  Total volume expanded by 9% from Wednesday’s total, effectively continuing its recent tendency to increase on down days and decrease on up days.  The daily Coppock Curve still has a bullish bias for all 24 S&P industry groups.

Thursday’s action presents us with a bit of a conundrum.  The early sell-off violated the support trend line of the channel we showed in yesterday’s post.  The afternoon rally then tested, but did not penetrate, that same trend line.  As a result, a case can be made that the trend line is now a resistance line.   That combination can be considered a negative (i.e., a breakdown then a test of the breakdown point).

However, an hourly low (post-February 9) was accompanied by a decent positive RSI divergence.  Moreover, both the hourly and daily Coppock Curves currently have a bullish bias and the 10-day CBOE put/call ratio is more oversold than not.  All of this is viewed as a net positive.

While we remain of the opinion that the S&P will at least test, if not penetrate, the early February low (at 1044) before a new intermediate rally takes hold, our sense is that Thursday afternoon’s rally will follow through and try to test the 1110-1116 range yet again.  Thus, while the uptrend from the February 5 low is bending, it has not yet been broken.

But, even if 1110-1116 is tested, it will likely be a last gasp.  We have made the case that the daily Coppock oscillator would remain positive into the early days of March and March begins next week.  Since a near term peak is likely to have negative medium term implications, we have to be alert to the idea that a coming peak – which is probably only days away – will lead to a decline that should last several weeks.  So, from an intermediate perspective, the downside risk likely outweighs the upside potential in terms of both price and time.

The aforementioned 1110-1116 resistance range encompasses a 61.8% retracement of the January-February decline, the point at which the “C” wave of the current rally is 1.618 times the “A” wave, and chart resistance generated by the late December low.  Clearly, a breach of that range would be at least a short term plus and imply further strength toward 1131-1150.

In the weeks ahead, we still think that the S&P is positioned to at least test, if not violate, its recent low near 1045.  Below Thursday’s low at 1086, next support is indicated at the 1078-1075 breakout point.  A breach of 1057 would be viewed as a breakdown.  Our longer term focus, of course, is on tactical support at 1029-1020.