Time to Pull in the Claws …

… but don’t expect to hibernate.

The S&P 500 has rallied for three straight days, with each day better than the previous. On Thursday, the index gained 2.1%, which was its best performance since June 1. Breadth was solidly positive and total volume even expanded (albeit by a modest amount). In addition, there are signs that near term momentum indicators will bottom in the next day or two. All of this indicates that the index is positioned to dig in its heels for a while.

In yesterday’s post, we pointed out that both the DJIA and S&P were positioned for a rally, despite their different wave structures. Today’s surge was a reflection of that, and the aforementioned near term momentum condition suggests that this rally may have some staying power. This, combined with potential end-of-quarter window dressing and a possible (and not uncommon) holiday bullish bias, suggests that the indexes may be able to “hang in there” into mid July.

S&P 500 with Near Term Momentum
That said, the action of the past several days does not change the overall counter-trend structure of the post-March rally, nor has it changed the deteriorating medium term momentum condition, nor does it erase what appears to be a declining 22-week cycle. All told, the S&P may be able to hold tactical support at 879-866, but we would view any further strength as an ending, not a beginning. Thus, even if the S&P manages to challenge its June high in the weeks ahead, such a rally will like only serve to create greater (in terms of both quantity and quality) divergences than those that already exist. Such a rally, therefore, would arguably be suitable only for the most nimble of traders.

As a result – and almost by definition – we will continue to use 927 as first resistance; followed by 935-936, then 956. Similarly, we will continue highlighting tactical support in the 879-866 range. A breach of that range would open the door for further weakness toward at least 812-777.