Still Ticking

On Monday, the S&P 500 spent virtually the entire day in negative territory. However, a final hour spurt allowed the index to finish with a 0.25% gain. Nonetheless, advance/decline ratios were negative for the S&P 500 (large cap), S&P 400 (mid cap), and S&P 600 (small cap) indexes, but upside volume comfortably outpaced downside volume. Moreover, the early weakness never threatened support or our dominant uptrend line.

We remain moderately bullish on the medium term trend. Medium term momentum is positioned to remain constructive into late May, early June. Trend following sentiment surveys are reversing to up, from down. And this rally has already retraced a significant portion of the January-March decline. Thus, we remain of the opinion that the S&P has the wherewithal to penetrate its January high at 944. That said, short term momentum is overbought and diverging, which suggests that a consolidation is due -- even overdue. Such a consolidation is expected to be a healthy event, and would 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.

We continue to view this post-March 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, higher highs should be viewed with that in mind. 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 Wave pattern from the 2007 bull market high is in the books.