"Reason" vs. Reality

It seems that our friends in the media (e.g., Bloomberg, CNBC, and Yahoo Finance among others) attributed Thursday’s stock market rally to “relief” over the government’s debt auction. We beg to differ on two fronts. First, did the market really rally? Second, was the auction really all that successful?

Yes, the DJIA did gain 1.3% points and the S&P 500 rallied 1.5%. Breadth was positive, and upside volume outpaced its downside counterpart. However, both indexes recorded a lower high and a lower low those seen on Wednesday. Moreover, the bullish percentage for the S&P 500 fell to 65.2, which is both overbought and a reaction low. As for the auction, 10-year yields fell 20 bp on Wednesday and gained two bp on Thursday. That’s successful?

S&P 500 with Ideal Nine-Month Cycle

Maybe some day, the media will use writers who understand the markets.

That said, we have not changed our outlook. Near term momentum is oversold and seems positioned to bottom in the days ahead. Meanwhile, intermediate momentum is nearing overbought levels and is positioned to peak in the weeks ahead. Thus, it is not inconceivable that that the next short term peak will also be an intermediate peak. If so, this would imply a 3-5 month correction from a late June or early July peak. This scenario is bolstered by the fact that we view the rally from the March low as an apparently corrective Elliott Wave structure even as both the 20-week and nine-month cycles appear to have peaked or are peaking. So, from the perspective of both price and time, the downside potential outweighs the upside potential.

Primary resistance remains at 930, 944, and 982. But, as we mentioned in recent posts, 912-916 may be more important than we gave it credit for.

The recent weakness reiterated the importance of first support at 879. For now, second support remains at 827.

Ten Year Yields Accelerate

On Wednesday, the S&P 500 fell 1.9%. This was its ninth decline in the 12 days since the rally high occurred on May 8. Near term momentum still appears positioned to bottom in the early days of June, but more and more cracks are appearing. Thus, we remain of the view that the next rally high should also be an intermediate peak. If so, it could be a difficult summer.

However, Tuesday’s attention was not so much on the stock market as it was on the bond market. Ten-year yields gained over 20 basis points, which was the largest such move since last October. That surge was also enough to break a downtrend line from June 2007 peak.

In recent reports, we have pointed out that the Elliott Wave pattern for yields was more impulsive than the pattern for long bond prices. While this represented something of a conflict, we have had to respect the idea that the yield count keeps open the possibility that the December yield low is a low of significance – perhaps even of historic significance.

Yields are now in an important resistance area. The 3.66%-4.04% range is both Fibonacci and chart resistance related to the decline from the 2007 high at 5.25%. With intermediate momentum already at confirming multi-year highs, we need to respect the possibility that this range will be violated in the weeks ahead,

First support has been raised to 3.30%-3.18%.

It Was All About Confidence

On Tuesday, the S&P 500 came back from the Memorial Day weekend with a 2.6% gain. Advancers outpaced decliners by more than an 11:1 ratio and, while some might argue that volume remained well below it’s 21-dma, we would point out that 424 of the stocks in the S&P rallied on increased volume. Near term momentum for most of the 24 industry groups remains under pressure, but Tuesday’s action seems to be a step in the right direction for the short term rally into late June that we discussed in the recent Insights. For Elliott Wave students, Tuesday’s action did much to confirm that the index completed a May 10-21 flat (3-3-5) correction.

Much of the “reason” for this rally was attributed to a better-than-expected consumer confidence report issued by the Conference Board. For a change, and at the expense of being called a “Keynsian Technician,” we agree. The data suggests that consumer confidence flashed a point and figure “buy” signal. While the index is still below its resistance trend line, it did break above a prior column of X’s. We would like to see a pullback and then a new rally high to confirm a consumer confidence uptrend, but the breakout to the highest levels since last October is also a step in the right direction. Currently at 54, the preliminary P&F objective is for a move into the 70’s.

Primary resistance for the S&P 500 remains at 930, 944, and 982. But, as we mentioned in recent posts, 912-916 may be more important than we gave it credit for.

The recent weakness reiterated the importance of first support at 879. For now, second support remains at 827.

New Insights

Our regular Short Term Review is being released. Among other topics, it deals with a momentum conundrum in the S&P. If you have not received it by Tuesday night, please e-mail me at wgmurphyjr@gmail.com

In coming days and weeks, look for a new format for this blog and a brand new web site.

Oil vs. Oil Stocks

After reading yesterday’s blog, which highlighted oil’s breakout, a close friend called and asked if it was time to buy oil stocks. With some concern in our voice, we quickly answered, “No!” The rationale was that we don’t buy stocks in a down market. Technicians tend to believe that 80%-90% of a stock’s move is influenced by the trend of the market. The balance is influenced by sector-specific and (to a lesser degree) company-specific factors.

In recent comments, we have made the case that, while the S&P's intermediate uptrend from the March low is still intact, it appears to be a structural bear market rally. Recent deterioration in the near term indicators, in turn, has been putting increased pressure on the post-March uptrend such that, even if the S&P 500 makes another run at the May 8th highs, the result would likely be more and greater negative divergences than those that already exist.

To put things in perspective, only 65 of the stocks in the S&P 500 are currently benefiting from improving near term momentum as of Thursday’s close (based on a scan using the daily MACD indicator). Of the remaining 435 deteriorating stocks, 289 are still on the overbought side of neutral. Thus, it is not beyond reason to suggest (as we have) that these near term pressures could last through May and possibly into June.

Similarly, none of the 39 stocks in the S&P energy sector (as listed by StockCharts.com), show an improving MACD. Moreover, 33 of the 39 deteriorating energy stocks are still overbought. So, if you believe as we do that the market has more work ahead of it before it is ready for a tradable rally, then it is likely that the same is true for energy stocks – even if oil does rally in the meantime.

In Tuesday night’s post, we reiterated resistance at 930, 944, and 982. But we also mentioned that 912-916 could prove to be important intervening resistance. Since then, the S&P has spent about two hours above that range. But time and again – both before and after those two hours – rally attempts have been repelled by that range. This, plus Thursday’s sell-off to as low as 880, suggests that 912-916 is more important than we gave it credit for.

We have recently been using 879 and 827 as indicated support. Thursday’s decline tested, but did not breach, first support.

Oil

In recent reports, we made the case that a rally by oil through 59-60 would be a potentially important event. On Wednesday, oil finally violated that important resistance area. Moreover, in point and figure terms, this rally can be described as a breakout through both a double top and a long-standing downtrend line. Moreover, we can make the case (admittedly with a bit of artistic license) that the rally prior to Wednesday’s breakout was impulsive.

How high is high? We have made the case that last year’s decline was the first leg of a larger pattern (i.e., an “A” wave in Elliott Wave parlance). Logic would suggest that a subsequent rally should be a Fibonacci retracement of that “A” wave. For example, in our March monthly Insights, we pointed out that a usually minimum 38.2% retracement of last year’s decline would result in more than a double (to 75) from December’s low. With that in mind, out primary P&F chart shows a potential objective of 73-74. Fibonacci relationships suggest a move to at least 64-65, with 69-71 and 77-79 viewed as realistic alternatives. Key support below the 60-59 breakout point is 57-56.

Hangover Tuesday

With the exception of total volume, Monday was a very solid day, so expectations of some follow-through on Tuesday could not be faulted. Instead, Tuesday showed signs of a hangover. The S&P 500 did spend much of Tuesday in a narrow range in positive territory, but a sell-off in the final 30-minutes resulted in a final 0.2% loss. However, the late decline was not enough to turn breadth or volume negative, creating a slight positive divergence,

That said, volume was even lower than Monday’s mediocre total. That makes two consecutive days where volume was a mitigating factor in the market’s attempt to rally. This, taken together with the fact that deteriorating near term momentum and sentiment indicators are still more overbought than not, calls the sustainability of the rally from Friday’s low into question. We would also note that the bullish percentage indicator for the S&P remains below its 10-dma.

In addition to the above, we have an interesting Elliott Wave development. It is relatively easy to count the rally from Friday’s low as a five-wave pattern on the hourly chart. Most of the time, such a development would be viewed as the first leg of a larger rally. However, the non-Elliott technicals suggest that we should be alert to the possibility that that the rally of the past two days is completing wave “2” or “B” within a larger decline from the 930 high. The fact that the S&P has not violated Fibonacci and chart resistance in the 912-916 area bolsters this more bearish count and can be added to our argument that the evidence does not bode well for a sustainable rally.

We cannot rule out the idea that the S&P still has a last gasp run to new highs left in it. But the weight of the evidence suggests that recent strength more likely an ending rather than a beginning. Until proven otherwise, we will view further rally attempts with skepticism.

Resistance exists at 930, 944, and 982. Support is apparent at 879 and 827.

No Changes

Monday started off the new week on a firm note. The S&P 500 rallied 3.0% while both breadth and volume qualified as a 9:1 day (both advancing stocks and upside volume represented more than 90% of the total of all stocks that changed price). There is a case to be made that this action represents a potentially significant upside reversal, but we are not yet prepared to take that step.

Total volume was significantly below average. Moreover, it appears that even if the market does mount another challenge of 930 and higher, last week’s damage may have been enough to meet such a rally with important negative divergences. This condition, plus the corrective Elliott Wave structure of the rally, does not bode well for a sustainable rally from current levels. Moreover, the near term momentum pressures that became evident last week still have the potential to remain in place through May.

That said, we cannot rule out further strength to new highs. Indeed, we dealt with that scenario in some detail in this weekend’s Insights. However, many intermediate indicators are at or near important overbought levels, sentiment is pushing excessively bullish readings, and important trading cycles have little, if any life left in them.

Can the market move higher? Yes it can. But the weight of the evidence suggests that Monday’s rally is more likely part of an ending rather than a beginning.

Resistance exists at 930, 944, and 982. Support is apparent at 879 and 827.

New Insights

Our current Insights is being released. If you do not receive it by late Monday, that means that you are not on one of our distribution lists. If you would like a copy, please e-mail me at wgmurphyjr@gmail.com.

Thursday Was a Non-Event

There is not much we can add to the posts of the past two days. Neither Thursday’s 1.0% rally by the S&P nor the fact that 19 of the 24 industry groups gained ground did much to heal the damage of the past two days. Indeed, the point and figure Sector Sum indicator for the S&P 1500 Supercomposite recorded a “sell signal” on Thursday.

That point and figure development joined the weak near term momentum condition that we have highlighted. As suggested yesterday, a single reversal could be ignored, but a number of signals taken together suggest that the March-May rally is in trouble.

All of those problems are mitigated – at least for now – by the fact that support at 880-879 has not been violated and intermediate momentum still has a bullish bias for 23 of the 24 industry groups. So a case can still be made that the weakness of recent days is a correction within the rally from the March low rather than a reversal of that rally.

Our concern is that, even if the market does regain its footing and mount another challenge of 930 and higher, the recent damage may have been enough to meet such a rally with important negative divergences. This condition, plus the corrective Elliott Wave structure of the rally, does not bode well for a sustainable rally from current levels. Moreover, the new near term momentum pressures have the potential to remain in place through May, which suggests that the rally from at least the April 21 “line of demarcation” will be reversed. Lower lows, therefore, will increase the odds that this is a reversal.

For now, nearby support remains at 880-879; a violation of that range would effectively confirm that the rally from the April 21 reaction low had been reversed. While a violation of that range would also make us more alert to the possibility that the post-March rally itself was in trouble, we may need to see a breach of 783 to confirm that larger reversal.
Beyond last week’s 929-930 rally high, next chart resistance is our 944 benchmark. Next Fibonacci resistance is the aforementioned 955-956 area.

Correction or Reversal?

On Wednesday, the S&P 500 fell 2.7%. That was the largest decline since April 20, the second loss in excess of 2.0% in three days, and the first three day losing streak since the March low. Moreover, 23 of the 24 industry groups were lower. Overall, Wednesday was a 90% down day (both declining stocks and downside volume represented more than 90% of the total for those common stocks that changed price).

In addition to the above – and as anticipated in Tuesday’s post – near term momentum has now recorded a downside reversal for a large majority of the industry groups and the uptrend line from the March low has been violated. In addition, the point and figure bullish percentage (%BP) indicator for the S&P 500, the S&P mid cap, the S&P small cap, the S&P super composite, and the NASDAQ 100 has violated its 10-dma. This is often regarded as a near to medium term “sell signal.” Any one of these signs of weakness could be taken with a grain of salt when viewed in isolation. But, when taken together, they suggest that the March-May rally is in trouble.

All of those problems are mitigated – at least for now – by the fact that support at 880-879 has not been violated and intermediate momentum still has a bullish bias for 22 of the 24 industry groups (although 15 of the 22 are on the overbought side of neutral). So a case can be made that the weakness of recent days is a correction within the rally from the March low rather than a reversal of that rally.

Our concern is that, even if the market does regain its footing and mount another challenge of 930 and higher, the damage of the past three days may have been enough to meet such a rally with important negative divergences. This condition, plus the corrective Elliott Wave structure of the rally, does not bode well for a sustainable rally from current levels. Moreover, the new near term momentum pressures have the potential to remain in place through May, which suggests that the rally from at least the April 21 “line of demarcation” will be reversed. Lower lows, therefore, will increase the odds that this is a reversal.

For now, nearby support remains at 880-879; a violation of that range would effectively confirm that the rally from the April 21 reaction low had been reversed. While a violation of that range would also make us more alert to the possibility that the post-March rally itself was in trouble, we may need to see a breach of 783 to confirm that larger reversal.

Beyond last week’s 929-930 rally high, next chart resistance is our 944 benchmark. Next Fibonacci resistance is the aforementioned 955-956 area.

Let’s Be Careful Out There

On Tuesday, the S&P 500 fell 0.1%. While this was a fraction of Monday’s 2.2% decline, it was in some ways more damaging to the post-March trend. For example, near term momentum now has a bearish bias for 10 of the 24 industry groups. While this is not yet a majority condition, such a significant minority is often a warning sign; as such, we could well see a majority bearish condition in the next day or two.

With that near term momentum condition in mind, it is also worth noting that the S&P is severely testing both its hourly trend line from the April 28 low and the daily uptrend line from the March low itself. The aforementioned evidence of renewed momentum deterioration does not bode well for the trend lines’ ability to prevent their imminent violation.

In recent posts we have referred to the increased fatigue being exhibited by the post-March uptrend. Tuesday’s evidence was clear evidence of that fatigue. Cycles, intermediate momentum, and even sentiment suggest that the rally still has some life left in it. And we still think that there is the potential for a challenge of 944-955. But we are reminded of the police sergeant in the award-winning TV show Hill Street Blues, who regularly told his colleagues to “Let’s be careful out there.”

Our concern is that, even if the market does regain its footing and mount another challenge of 930 and higher, the damage of recent days may have been enough to meet such a rally with important negative divergences. These condition, plus the corrective Elliott Wave structure of the rally, does not bode well for a sustainable rally from current levels.

Nearby support remains at 880-879; a violation of that range would confirm that the rally from the April 21 reaction low had been reversed. A violation of that range would also make us more alert to the possibility that the post-March rally itself was in serious trouble. Beyond last week’s 929-930 rally high, next chart resistance is our 944 benchmark. Next Fibonacci resistance is the aforementioned 955-956 area.

A Solid Decline

Monday was arguably the most difficult day for the S&P 500 since April 20th. The index’s .2.2% decline was the largest since then and the 19 declining industry groups (out of 24) was the also the largest since then.

We have referred to the intra-day lows on April 21 as a line of demarcation in the sense that the rally since then was a second leg of the larger uptrend from the March 6 low. Monday’s weakness, plus the fact that the most recent rally from the May 8 low was arguably the first Elliott Wave three-wave (counter trend) rally since April, could be a sign that the April-May (and perhaps the larger March-May) rally is beginning to show signs of fatigue.

That said, no uptrend lines have been violated and momentum is constructive, Moreover, while the rally from the April 21 low is 50% of the initial March-April uptrend, it is still shy of the usual minimal 61.8% relationship (at 955-956).

With the above in mind, nearby support remains at 880-879; a violation of that range would effectively confirm that the rally from the April 21 reaction low had been reversed. A violation of that range would also make us more alert to the possibility that the post-March rally itself was in trouble. Unless and until that range is violated, the rally will continue to receive the benefit of the doubt.Beyond last week’s 929-930 rally high, next chart resistance is our 944 benchmark. Next Fibonacci resistance is the aforementioned 955-956 area.

Insights

A new Insights has been released. It is focused on the implications of this past week's action in the S&P 500, bonds/10-yr yields, the dollar and oil.

If you would like to receive a copy, please e-mail me at wgmurphyjr@gmail.com.

So Close, Yet So Far

The S&P 500 opened on a firm note Thursday morning, carrying to just shy of 930 before Mr. Market decided that enough was enough for now. Perhaps the fact that the “500” had moved to within 1.5% of our benchmark 944 was too much to bear. Regardless, the index turned tail and finished the day down 1.3%. This was the biggest setback since April 20 and occurred on increased volume. Eighteen of the 24 industry groups were lower for the day.

The hourly chart violated the 910-909 short term support range mentioned in yesterday’s post. That effectively reverses the rally from the May 1 low. For now, that is all we are going to give this pullback credit for. As such, the current pullback may not go much below the 891-890 area, which is a 61.8% retrace of the rally from May 1. If it does, we would have to entertain the idea that the S&P is correcting the larger rally from the April 21 low.

We are inclined to think that a correction of the rally from the April 21 low may be a worst case. Breadth is leading the indexes, intermediate momentum is still positioned to maintain a bullish bias into June, and a number of P&F indicators are at confirming multi-year highs. We remain of the view that higher highs are likely in the days (and weeks) ahead.

We have no changes to our March-May resistance and support levels. Thursday’s 929-930 high is resistance, but 944 remains our main focus.

Key support relative to the current upleg from the April 21 low is at 848-847.

A Refreshed S&P Challenges 920

The monthly Insights is finished and is in the process of being e-mailed to our various lists. If you do not regularly receive Insights, please e-mail us (wgmurphyjr@gmail.com) and we will correct the situation.

The S&P gained 1.7% on Wednesday, supported by fairly broad participation (16 of the 24 industry groups were higher) and a solid increase in volume. In addition, both the S&P small cap index and the NASDAQ closed higher while experiencing an “outside day.” This combination is viewed as a bullish reversal and often does have positive implications.

We still do not see any significant red flags. Momentum is constructive, many sentiment indicators are positive, breadth is confirming – even leading – the indexes, and cycles still have a bullish bias. All of this suggests that the rally may be in position to remain intact for another 2-4 weeks. So, we remain of the view that higher highs are likely in the days (and weeks) ahead.

We have made the cases that, since April 21, the hourly patterns have had an impulsive quality to them from an Elliott Wave perspective. This trending quality is another plus. The current “wave” has been in force since May 1 and has hourly support at 910-909.

From a bigger picture point of view, we have no changes to our March-May resistance and support levels. The S&P did make a “peek-a-boo” move though 919, but 944 remains our main focus; we discuss that in some detail in the new Insights. It is not a stretch to suggest that other resistance levels are relatively irrelevant. We believe that 944 will be violated.

Key support relative to the current upleg from the April 21 low is at 848-847.

A Pause That Refreshes

We are still working on the monthly Insights and hope to release it tomorrow (Wednesday). If you do not regularly receive our Insights, please e-mail us (wgmurphyjr@gmail.com) and we will correct the situation.

The S&P lost a modest 0.4% on Tuesday. Most other indexes were lower, as were most advance-decline lines. So, by most definitions, Tuesday was a “down day.” However, volume was lower than that seen on Monday and, by our reckoning, upside volume outstripped downside turnover. All of this suggests that Tuesday’s reaction was a simple case of profit-taking after Monday’s solid gain. There was no evidence of a meaningful reversal.

So, we remain of the view that higher highs are likely in the days (and weeks) ahead. Until proven otherwise, pullbacks such as Tuesday’s will be approached as pauses within a still unfinished uptrend,

We have pointed to 897-919 as a resistance area, but 944 is our main focus since a rally through that benchmark will confirm a reversal of the entire 2007-2009 decline. In that regard, it is not a stretch to suggest that other resistance levels are relatively irrelevant. We believe that 944 will be violated.
Nearby support is at 885-875 and below, but key support relative to the current upleg from the April 21 low is at 848-847.

Monday to traders: This rally still has legs

We are currently working on the monthly Insights. It should be released later this week. If you do not regularly receive our Insights, please e-mail us (wgmurphyjr@gmail.com) and we will correct the situation.

You know that a market move has staying power when economists claim that it is “only technical.” Be that as it may, Monday’s action increases the evidence that this rally really does have legs. The S&P 500 rallied 3.4% and all 24 S&P industry gained ground. As a result, our advance-decline line based on those groups has moved above its January high, as have the a-d lines for the S&P 500 itself, and the S&P 400 mid cap. They join the NYSE a-d line, which cracked its January high last week. The a-d lines for the S&P 600 small cap and S&P 1500 super composite indexes are just below their January benchmarks.

In addition to the a-d lines, a number of point and figure indicators have confirmed the rally, and near term momentum, which has been lagging, has finally turned up and is supporting the bullish intermediate oscillators. Finally, the rally has taken on an Elliott Wave impulsive look in recent days, which is in contrast to the counter trend characteristics that were evident in the early weeks of the rally.

All of this suggests that higher highs are likely in the days (and weeks) ahead. Inevitable pullbacks will be viewed with these confirming underpinnings in mind,

This implies that the rally from the April 21 low will have a Fibonacci relationship to the initial March-April rally. We have pointed to 897-919 as a resistance area, but 944 is our main focus since a rally through that benchmark will confirm a reversal of the entire 2007-2009 decline. In that regard, it is not a stretch to suggest that other resistance levels are relatively irrelevant. We believe that 944 will be violated.

Monday’s action suggests that nearby support should be raised to 885-875 and below. We are also raising key support to 848-847, from 830-825.

April Flowers Are Part of a Bigger Garden

The S&P 500 gained 9.4% for the month of April. It was a broad-based advance in the sense that 22 of the 24 industry groups were higher for the month and the longest losing streak during the month was only two days. From our perspective, however, the more important statistic is that the S&P rallied 18.7% during March and April.

That 18.7% two-month rally is the sixth time since 1974 that the S&P has posted a two-month gain in excess of 14.5%. The other five were January-February 1975, October-November 1982, January-February 1987, September-October 1998, and October-November 2002. Four of those represented confirmed breakaways from some of the most important bottoms in history. The exception (1987) confirmed a rally that still had six more months of life left in it. In all five cases, the next (third) month was also an up month; this would seem to bode well for May.

There are other signs that the post-March rally still has more life left in it. The NYSE a/d line has moved above its January high, as have a number of point and figure indicators. Moreover, intermediate momentum still has the potential to maintain a bullish bias into June, and the breakout of recent days has a trending (impulsive) look to it from an Elliott Wave perspective. All of this does much to confirm yesterday’s post where we suggested that a second phase of advance had begun.

This implies that the current rally will have a Fibonacci relationship to the initial March-April rally. While we are inclined to look for resistance at 897-919, then 944, our main focus is the latter level. A rally through that benchmark will confirm a reversal of the entire 2007-2009 decline. In that regard, it is not a stretch to suggest that other resistance levels are relatively irrelevant. We believe that 944 will be violated.

Nearby support begins at 865-867, but key support is 825-830.