Breakout!

In our March monthly “Insights,” we made the case that the best rally since 2007 was “in sight.” That goal has not yet been achieved, but Thursday’s rally was a solid step in the right direction. The 2.9% gain was aided by increased breadth and volume ratios, as well as an increase in total volume. Moreover, the index broke out through last week’s high, which can be viewed as the completion of a “cup and handle” base. It may also ultimately prove to be an “inverted head and shoulders” bottom. Both formations imply higher rally highs.

If there is a problem, it comes from momentum. Near term oscillators, which had been deteriorating against most stocks since last week, have begun to improve again, but are doing so from an overbought condition, rather than a more normal (and healthier) oversold position. This may prove to be near term impediment.

For Elliott aficionados, Thursday’s action makes the overall pattern from the March low more difficult to count, so we may need to give it some more time to let the picture clear up. That said, there are three important points of note. First, the overall pattern is more corrective than not, so our thoughts that this is a bear market rally remains valid. Second, the aforementioned behavior of near term momentum suggests that the pullback from last week’s high to Monday’s low was an interruption within a post-March “A” wave, not a “B” wave of the same degree as we thought. Finally – and most importantly – the extent of this rally is enough to satisfy the minimum requirements for a complete pattern from last May’s high. There will be more on this in our April long term “Insights,” which will be released in coming days.

With the breakout through 833, further nearby potential is to at least 863-883, which is both Fibonacci and fairly substantial resistance. However, a 38.2%-50% retracement of the decline from last May’s high implies that this bear market rally could ultimately challenge of 945-1055. Most of the nearby support is in the 800-780 range.