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.