Equity Rally Still OK; Oil Seems Toppy

Although the S&P 500 lost only 0.1% on Monday, it was the index’s third decline in four days. Moreover, the modestly lower close was the result of a strong final hour. It could have been worse – indeed the internals remained quite weak. For example breadth for the index was negative by a 3:2 ratio, while NYSE common stock breadth was negative by a 2:1 ratio. Downside volume outstripped upside volume but, more importantly, our primary accumulation line dropped below the distribution line for the first time since mid March.

Despite those negatives, both near and medium term momentum indicators still have a bullish bias for most of the S&P’s 27 industry groups. Moreover, the dominant uptrend line remains intact. We are inclined to continue to give the rally the benefit of the doubt for as long as both of these conditions exist. A reversal of momentum and a breach of the trend line would be a distinct negative. Our resistance focus remains on 982. The first support/trading stop level is at 923 (compared to Monday’s low of 926.44).

S&P 500 with Daily Momentum

In last night’s comment, we mentioned that we could now count five waves from oil’s April low, suggesting that oil needs a rest. Monday’s decline was enough to result in a three-box reversal on oil’s point and figure chart. This further strengthens the idea that oil could experience its most important correction since April’s low in the 46-47 range. A break below 65-64 would lock in the five-wave pattern and allow for further weakness to at least 63-60 and possibly 57-56. Resistance is the recent high above 70.