Here We Go Again

On Monday the S&P 500 suffered its largest loss in two months with a decline of 3.1%. Although total volume declined slightly from Friday’s level, Monday was the second 9:1 down day in a week (i.e., declining stocks represented 93% of NYSE common stocks that changed price, while down volume was 94% of the sum of up and down volume). Among the 24 S&P industry groups, only Telecom Services managed to eke out a gain.

In our last two posts, we suggested that a relief rally would only be of a few days duration, and today’s decline clearly and decisively reversed the Wednesday-Friday bounce. More importantly, the decline from Friday’s high was another five wave pattern, following up on the June 11-17 five wave decline. While this second five could be only a “C” wave as part of a larger ABC counter trend decline, the risk is that today’s decline might prove to be the opening salvo in a larger five wave decline. We say that because the intermediate deterioration has been rapid. For example, a large plurality of the stocks in the S&P 500 saw their weekly MACD take on a bearish bias last week. Similarly, a plurality of the 24 industry groups saw their weekly Coppock Curve turn down. It is fairly likely that a majority of the stocks and groups will see bearish momentum reversals by the end of this week. If so, this would imply that the S&P is in the early stages of a potential 3-5 month correction/consolidation. Thus, we need to respect the idea that today’s decline was the opening salvo of a third wave, not a “C” wave.

Weekly MACD Position of S&P 500 Stocks

Last week’s rally carried to 927 (right in the middle of our 924-930 objective), so we will use that a first resistance; beyond that, resistance is indicated at 935-936, then the 956 rally high.

S&P 1500 Sector Sum Indicator

The current decline should be at least as long as the June 11-17 decline but, for now, we will continue highlighting support in the 879-866 range. A breach of that range will be of tactical importance. In that regard, it may prove to be significant that the a-d line for the S&P 500 (as well as those for the S&P 400 and S&P 600) has already violated its equivalent of 87-866. So has the Sector Sum point and figure indicator for the S&P 1500. Thus, if 879-866 is violated, it would not be a stretch to look for further weakness toward at least 812-777.