Trend Reversal

We have been suggesting that near term momentum was positioned to take on a bearish bias by the end of March, even as short term sentiment (as measured by the 10-day put/call ratio) was overbought. This helped us to conclude that a break below 792 would be a breach of both chart and trend support and would open the door for a deep retracment of March’s gains. Today’s 3.5% decline triggered both the momentum reversal and the violation of key support. Therefore, lower lows are likely – possibly into mid April (just as many people are writing out those checks to the IRS).

Given that notion of lower lows, we will monitor the S&P’s ability to handle chart (and Fibonacci) support at 775-766 (with particular focus on 773-772), 750, and 730-725. For now, the only resistance worth considering is Thursday’s 833 high. Utilities, Healthcare, and Consumer Staples are currently showing the best short term relative strength characteristics.

For Elliott fans, the March 6-26 rally pattern is almost certainly corrective in nature. A break below 773-772 would confirm this “bear market rally” structure. However, intermediate momentum is solidly positive for a great majority of the stocks within the S&P 500. This makes us think that the just completed rally was an “A” wave, the index is now in a “B” wave pullback, and a “C” wave to new bear market rally highs is yet to come. The risk, of course, is that surprises are typically to the downside in a bear market.