Reversal!

No matter how you slice it, Monday was a broad-based decline. The S&P 500’s 4.3% sell-off was the largest since before the March low. In addition, each of the index’s 24 industry groups lost ground. As a result, Monday was a 90% day. In other words both declining stocks and downside volume were more than 90% of advancing plus declining stocks and upside plus downside volume, respectively. In an overbought market, that is not a good sign.

The S&P closed at the day’s low (832.39). In our weekly Insights (released Monday morning) we indicated that a decline through 835 would lock in the uptrend from the March low as a complete pattern. This, plus the fact that every uptrend line from the March low has been violated, means that Monday’s sell-off was a decisive reversal.

In addition to the decisive break of trend, Monday’s decline means that the structure from the early March low was clearly a corrective Elliott Wave pattern. In “Plain English,” it was a bear market rally pattern. Thus, we need to respect the idea that what we saw is all we are going to get. The potential is that the S&P is in the early stages of a decline to new bear market lows. That said, both medium term momentum and sentiment still have a bullish bias and have the potential to withstand the pressures of a near term decline. Therefore, we will - until proven otherwise - treat this decline as the “B” wave of a larger uptrend. The potential for higher rally highs to follow this sell-off will deteriorate if we see signs of an impulsive decline, but that is not evident yet.

Even allowing for a higher high, Monday’s breach of 835 still means that this (“B” wave) correction could challenge the 796-771 area in the days ahead. A decline much below that range would probably open the door for a full test of March’s 667 low.