No Harm? No Foul?

On Tuesday, the S&P 500 fell 2.0%, while both breadth and volume were decidedly negative. Moreover, near term momentum is weak and remains positioned to be under pressure for most of the rest of the month.

Even so, Tuesday’s pressure did not challenge support, not did it challenge the dominant March-April uptrend line. And, surprisingly, the point and figure bullish percentage indicators for the S&P 500, 400, and 1500 actually gained ground, and remained unchanged for the S&P 600. The indicator is at post-March highs for all four indexes. So, no harm has been done to the trend. However, the trend is near term overbought and the divergences we have discussed in recent posts are still evident. So, the potential for a near term consolidation remains high.

That said, we remain moderately bullish on the medium term trend and still believe that the S&P 500 has the wherewithal to penetrate its January high at 944. Thus, an expected near term consolidation is expected to be a healthy event within the medium term uptrend. Such a consolidation should, therefore, re-invigorate the market’s technical underpinnings.

The bottom line is that, while this rally is already the best advance since the 2007 peak, still higher highs are likely.

Nearby support is at 817-815. A decline through that range will confirm that that what should be the first upleg from the March 6 low is complete. Second support is at 789-766.

Despite our expectation of higher highs in the weeks ahead, we continue to view the rally as a corrective or counter-trend pattern from an Elliott Wave perspective. Thus, this should ultimately prove to be a bear market rally. So, the expectation of higher highs is not an “all clear” sign. It's a date, not a marriage. First resistance appears to be 863-883; beyond that, 944 is an approximate 38.2% retracement of the decline from last May’s high. A rally through that benchmark will do much to indicate that a complete Elliott pattern from the 2007 bull market high is in the books.