Stocks and Bonds (Again)

On Thursday, the S&P rallied 0.6%. Both the breadth ratio and the up/down volume ratio were moderately positive. Total volume increased slightly, but remains below its 21-dma. Internally, 485 common stocks rallied on increased volume, versus the 266 that fell on greater turnover.

Yesterday’s rally allowed the S&P to close at a new rally high. However, neither the daily cumulative a-d line nor our accumulation model confirmed those highs. Moreover, the S&P has not been able to put two consecutive up days together since June 2, which we view as something of an “internal peak” (i.e., the last time that most indicators confirmed the rally).

Putting all of this together, we would not be surprised if near term momentum peaks on Friday. Our preferred oscillator (the daily Coppock Curve) is already showing negative divergences and has not been in oversold territory since March. Overall, we would not be surprised if new short term pressures last for 2-3 weeks or more. If so, this would likely begin to put pressure on intermediate momentum and the post-March rally itself at risk. Thus, rallies in the days ahead are likely to along the lines of a last gasp, not a re-acceleration. Be careful out there.

That said, we still need to see a reversal of momentum, together with a breach of the dominant trend line and a violation of 923 (our first support/trading stop level), before a potentially significant top would be indicated. Our resistance focus remains on 982.

Editorial comment: As we write this, the TV is on in the background and is tuned to a business channel. Among the “experts”, one said that Thursday’s trade came close to generating a Dow Theory buy signal; another said that the market had rallied 40% from the lows and was down 40% from the highs, so it is in the middle of the bear market range. Both “experts,” were wrong, showing a clear lack of understanding of the technicals and/or a clear misunderstanding of simple math.

Long Bond with Medium Term Momentum

As for the long bond, yesterday may have been an upside reversal day. The continuous contract closed higher after recording both a lower low and a higher high than those seen on Wednesday. Moreover, the bond is clearly oversold. All of this suggests the potential for a pretty good rally.

In Elliott Wave terms, the bear case is that a coming rally will only be a fourth wave from the highs, suggesting that a coming rally will carry to no higher than 119:20-122:04. If the long bond fails to penetrate that range, then breaks to new lows, the result will likely be a clean five wave decline from the highs. That, in turn, would be viewed as the first leg of a larger decline and increase the potential that an historic top is in place. By contrast, if the aforementioned range is violated, then the bull argument would be that the decline from last December’s high was only a counter-trend move, and would allow for a more substantial rally. Support for now is obviously Thursday’s low.