"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.